-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ItVjBmT0jcceuvAV0ryljR+POLcXFW66Ti/DX5PtpPQOTHtCOjZKfj3DtQNDyK0h a0QFYh4Hp/t3/GF/ocP/Hw== 0000950005-98-000321.txt : 19980401 0000950005-98-000321.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950005-98-000321 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK PERIPHERALS INC CENTRAL INDEX KEY: 0000922521 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 770216135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23970 FILM NUMBER: 98580102 BUSINESS ADDRESS: STREET 1: 1371 MCCARTHY BLVD CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083217300 MAIL ADDRESS: STREET 1: 1371 MCCARTHY BLVD CITY: MILPITAS STATE: CA ZIP: 95035 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-23970 NETWORK PERIPHERALS INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0216135 (State or other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 1371 McCarthy Boulevard Milpitas, California 95035 (Address, including zip code of principal executive offices) (408) 321-7300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Title of class Common Stock Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 18, 1998 was $94,251,917 based upon the closing price of the Registrant's Common Stock on the Nasdaq National Market System on that date. The number of shares of the Registrant's Common Stock outstanding as of March 18, 1998 was 12,260,412. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its annual meeting of stockholders to be held on May 26, 1998 are incorporated by reference into Part III of this Annual Report on Form 10-K. 1 NETWORK PERIPHERALS INC. FORM 10-K TABLE OF CONTENTS
PART I Page ITEM 1. Business ............................................................... 3 ITEM 2. Properties ............................................................. 10 ITEM 3. Legal Proceedings ...................................................... 10 ITEM 4. Submission of Matters to a Vote of Security Holders .................... 10 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters 11 ITEM 6. Selected Financial Data ................................................ 12 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 13 ITEM 8. Financial Statements and Supplementary Data ............................ 17 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................ 33 PART III ITEM 10. Directors and Executive Officers of the Registrant ..................... 34 ITEM 11. Executive Compensation ................................................. 34 ITEM 12. Security Ownership of Certain Beneficial Owners and Management ......... 34 ITEM 13. Certain Relationships and Related Transactions ......................... 34 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........ 35 Signatures ............................................................. 37 Supplemental Schedule .................................................. 38
2 PART I ITEM 1. BUSINESS Network Peripherals Inc. (the "Company") was incorporated in California in March 1989 and reincorporated in Delaware in June 1994. The Company's principal offices are located at 1371 McCarthy Boulevard, Milpitas, California 95035, and its telephone number is (408) 321-7300. BUSINESS The Company designs, manufactures, markets and supports a full range of high performance FDDI, 10/100 and Gigabit Ethernet switching solutions for workgroups, wiring closets and network backbones. These solutions are designed to enhance the bandwidth and performance of client/server networks, embrace all popular high-speed technologies and preserve the end-user's existing Ethernet investments. The Company introduced its first FDDI network adapter products in 1990 and has established a leading share of the installed FDDI adapter market. The Company introduced its first FDDI concentrator product in 1991 and began commercial shipments of its first FDDI LAN (local area network) switching product, the EIFO series, in the first quarter of 1994. In 1995, the Company announced its Fast Ethernet product line and made initial shipments of its Fast Ethernet LAN switching products in early 1996. In 1997, the Company introduced a number of new products, including switches designed to interconnect workgroups to enterprise backbone networks, switches with 10/100 auto-sensing features, and standard and custom OEM adapters based on the PCI bus architecture. In March 1996, the Company acquired NuCom Systems, Inc. ("NuCom"), a Taiwan-based networking company focused on Fast Ethernet switching products. This acquisition enabled the Company to introduce a number of new Fast Ethernet products during that year. A majority of the Company's current Fast Ethernet product offerings are based on the switch architecture developed by the research and development activities in Taiwan. In April 1997, the Company acquired NetVision Corporation ("NetVision"), a privately held company located in Long Island, New York. NetVision specialized in the development of very high bandwidth LAN switching and Gigabit Ethernet technologies. This acquisition positioned the Company to develop its next generation of Ethernet switching products to be introduced in 1998. The Company markets its products worldwide through OEMs, distributors, VARs and system integrators. PRODUCTS The Company's current line of products consists of a range of Fast Ethernet and FDDI LAN switches and hubs, FDDI to Fast Ethernet bridges, FDDI Network Interface Cards, and network management software. Most of these products are based on core technology and proprietary ASIC components designed by the Company. The products are offered in a variety of models, configurations and forms. The information in the following paragraphs contains forward looking statements describing new products that are expected to be available for shipment to the Company's customers during 1998. The successful completion and shipment of these products is subject to a number of uncertainties, including verification testing to confirm that the products meet the Company's standards for quality, reliability and interoperability; availability of components; pricing actions by competitors that may render it unprofitable to introduce the products; market acceptance of the products; and the emergence or broad acceptance of new technologies that may render the products obsolete. Recently, the Company re-aligned its products and operations into three groups: NuSwitch, NuWave and NuCleus, each with its own charter to develop, engineer and market new and existing products. The NuSwitch group is focused primarily on FDDI LAN switching products and FDDI network adapter products currently being sold to OEM customers and a broad line of Fast Ethernet products sold principally through distribution channels. The NuWave group intends to introduce new Fast Ethernet and Gigabit Ethernet solutions aimed at the small-to-medium enterprise (SME) market in 1998. The NuCleus group focuses on low cost 10/100 Mbps Ethernet switches and hubs in motherboard form. 3 NuSwitch Product Line Network Adapter Products The Company's line of FDDI network adapters, NuCard, connects high-performance servers or desktop computers directly to 100 Mbps FDDI networks. The Company has been a leading supplier of certified FDDI adapters since shipment commenced in 1990. NuCard adapters support both fiber and unshielded twisted pair (UTP) copper wiring and are available for popular platform bus architectures including SBus and PCI. Customized versions have been developed for resale under OEM arrangements with Sun Microsystems and Network Associates. The adapters and software developed for Sun Microsystems are based on the Company's standard SBus architecture and PCI architecture. They support Sun Microsystems' SPARC and UltraSPARC work station and server product lines, including their current lines of PCI based workstations. The Network Associates product is a customized version of the Company's PCI adapter with enhanced features for use with the Network Associates Sniffer Network Analyzer. The Company's NuCard adapters incorporate software drivers for leading network operating systems including Novell NetWare, Microsoft NT, and Sun Microsystems' Solaris. The Company provides a standard set of diagnostics, connection management (CMT) and station management (SMT) software tools. CMT software continuously monitors network connections for bit errors and network faults, while SMT software provides network management and gathering of network performance statistics. LAN Switching Products LAN Switches. In 1997, the Company added a number of new Fast Ethernet LAN switching products to its NuSwitch product line that offer solutions ranging from desktop to backbone connectivity, including the FE-208, a series of Fast Ethernet switches with 10/100Mbps auto-sensing capability, and the FE-224, a recipient of the "iAward" from Informationweek magazine. The Company also introduced two new high-density fiber-switching solutions, the DS12 and the DS12TF in 1997. These two products are 10/100Mbps auto-sensing, 12-port switches, with optional connections to either fiber or UTP. They are designed to satisfy the requirements of mission critical networks running high-demand applications in campus environments. The Company believes that they are the first Fast Ethernet backbone switches with features and performance previously found primarily in high-end, chassis-based switches. LAN Hubs. The Company's NuHub includes three LAN switching hubs designed to expand the network of the 100Base-TX users. The FE-5208 provides eight 100Base-TX Class II Fast Ethernet ports, each capable of half- or full-duplex transmission. Each connected workstation can have access to all connected file servers over the high-speed connection without changes to the desktop network. The NuHub LAN switching hubs have the same form factor and management software as the NuSwitch switching products, providing a convenient single-vendor 100Mbps connectivity solution. The FE-5516 and the FE-5216 are stackable sixteen 100Base-TX Class II Fast Ethernet port hubs that provide true network scalability. The FE-5516 is stackable up to eight units within one repeater count, expanding the network up to 128 high-speed shared connections. The FE-5216 provides scaleable expansion with the ability to stack up to five units without incrementing the repeater count. To expand further, two stacks of FE-5216 can be cascaded together through an uplink connector, the NuLink, which allows the network to expand up to 158 ports. The Company also designs and manufactures a custom FDDI concentrator module for Newbridge Networks. This product, available in a number of different configurations, is designed to be integrated in Newbridge Networks' Access/One enterprise hub. LAN Network Management Software. The Company believes that network management software is an important tool for network administrators who need to manage, maintain and control the operation of client/server remotely. The Company provides standards-based network management software in all of its managed products. The Company's LAN switching products come standard with SNMP and RMON software that allows its switches to be configured and monitored from a management station. In 1997, the Company introduced a major revision of its NuSight SNMP management platform, which now provides RMON Manager tools for network diagnostics and performance monitoring. NuSight 2.0 provides a graphical view of the switching product to enable the network administrator to manage network connections and configuration, gather statistics to monitor network traffic and plan for future growth. It operates in a Microsoft Windows environment, including Windows 95, Windows NT Workstation 4.0 and Windows NT Server 4.0. In addition to the NuSight 2.0, the Company introduced new management features across all its switches and hubs that enable the devices to be managed via a standard web browser. The Company intends to introduce a number of new products in 1998, including a Fast Ethernet to FDDI bridge, other variations of high-density 10/100 auto-sensing switches, and Gigabit Ethernet solutions. 4 NuCleus Product Line The NuCleus products provide a full range of wire-speed 10/100 auto-sensing switching and repeater hub motherboards, in 2,4,8 and 12 port configurations, based on the Company's third generation NuCleus ASIC chipsets. These board-level switches and hubs are designed to enable OEM customers to differentiate their products with the Company's high performance technologies and to shorten their development cycles to increase time to market. These products commenced volume shipment in early 1998. NuWave Product Line NuWave is an innovative line of Ethernet, Fast Ethernet, and Gigabit Ethernet solutions being designed for the SME market based on technology and ASICs developed primarily by the Company. The introduction of the NuWave family of products is scheduled for mid-1998, with shipment expected to commence by the fourth quarter of the same year. The NuWave product family is expected to consist of very high bandwidth switching platforms in flexible, "building block" form that offer high-density switched/hub ports that are stackable and scalable in performance and configurations for networks up to 1,500 nodes with complex and stringent network requirements. Networks of this scale require reliability, scalability and flexibility since as many as 30% of their nodes move or change annually. Thus, the devices themselves need to be intelligent, fault-tolerant and flexible in their configurations while being affordable and simple to use. The NuWave family of 10/100 and Gigabit Ethernet switching solutions is being designed with a 64-Gbps switching fabric to deliver wire-speed Layer 2 and Layer 3 (IP/IPX) switching for 10/100/1000 Mbps Ethernet networks in a scaleable and non-blocking stackable form factor. The new platform is designed to accommodate options such as high-speed LAN/WAN uplinks, advanced web-based management functions, with intuitive, policy-based network management software, redundant power supplies and flexible media connections -- capabilities that are found currently only in expensive, large-scale enterprise systems. The NuWave switching family, with a very high bandwidth architecture and flexible configuration plus a comprehensive collection of advanced switching and network management functionalities, offers networking and system OEM customers a next generation switching platform. The Company plans to utilize the NuWave product line to penetrate the rapidly emerging Gigabit and stackable Layer 2/3 10/100 Ethernet switching market in 1998. MARKETING, SALES AND SUPPORT The Company sells its product worldwide through OEMs, VARs, distributors and system integrators. As of December 31, 1997, the Company employed 36 full-time technically trained marketing, sales and support personnel located in the United States, the Netherlands, Singapore, Japan and Taiwan. These personnel, in addition to traditional marketing and sales functions, are responsible for developing relationships with major end-user accounts and with network operating system software leaders such as Novell, Sun Microsystems and Microsoft. The Company believes that such relationships are crucial to early development and deployment of optimal solutions for network applications. The majority of the Company's historical and current sales are to OEM customers with the balance of the sales to distributors and VARs. While the Company does not generally obtain long-term purchase commitments from its OEM customers, it does customarily enter into contracts with OEM customers to establish the terms and conditions of sales made pursuant to orders from OEMs. The Company's standard products are distributed globally through the reseller channels in North America, Asia and Europe. In addition to North America, the Company's products are currently distributed internationally, primarily in Europe and Asia. The Company has sales offices in the Netherlands, Taiwan and Singapore. Sales to customers outside of North America represented 26% of the Company's net sales in 1997. The geographic regions with the major portions of export sales in 1997, and the approximate respective percentages represented by each, were Europe, 11% and Asia, 15%. All payments for sales outside the United States are made in U.S. dollars. 5 Sun Microsystems accounted for 39% of net sales in 1997. In the past, the Company has experienced fluctuations in the volume of activity with individual OEM customers and distributors as well as changes in its OEM customer and distributor base, and it expects such fluctuations and changes to continue in the future. The loss of a major customer, reductions of a major order or delay in a major shipment could adversely affect the Company's business and financial performance. OEM customers typically provide the Company with a rolling forecast placed two to three months in advance of shipment, while resellers typically provide the Company with orders placed 30 days or less in advance of shipment. However, due to order cancellations and order changes and depending on the mix between OEM and reseller orders and the ability or resources of the Company to meet demand schedules, the Company's backlog may or may not be indicative of revenue in the future periods. The information in the following paragraph contains forward looking statements describing the Company's sales and marketing strategy. There are a number of uncertainties that could affect the success of the plan including the timely availability of new products by the Company, reliability, price and performance characteristics of the components, new and existing products, the introduction of similar products by competitors, pricing actions by competitors and the inability of the Company to recruit and retain required sales and marketing staff with the needed skills. Beginning 1998, the Company's sales and marketing strategy for its Ethernet products will emphasize developing an OEM customer base, a potentially lucrative market, with a lower level of support expense. The Company will continue its commitment to support its existing base of resellers and seek new opportunities in its reseller channels. RESEARCH AND DEVELOPMENT The information in this section contains forward-looking statements describing the Company's product development plans for 1998 and beyond. The successful development and introduction of new products is subject to a number of uncertainties, including the ability of the organization to recruit, train and retain adequate numbers of professional engineers, successful design of proprietary application specific integrated circuits and computer software, design, development and verification testing to confirm that the products meet the Company's standards for quality, reliability and interoperability, availability of components, pricing actions by competitors that may render it unprofitable to introduce the products, unanticipated technical obstacles or delays, and the emergence or wide acceptance of new technologies that could render the products obsolete. The Company has developed certain core competencies applicable to multiple network technologies such as FDDI, Fast Ethernet, ATM and ASIC design and client/server operating system drivers and software modules. The Company believes its focus on these core competencies has been, and will continue to be, a significant factor in its competitive ability to bring emerging network solutions to the market in a timely manner. Network Bandwidth Switching. The majority of the Company's research and development efforts are currently focused on developing its NuWave family of products. The Company is designing numerous high-density ASICs that provide the architectural platform with a 64 Gbps switching fabric for Gigabit and stackable Layer 2 and 3 (IP/IPX) 10/100 Ethernet switches. Through its acquisition of NetVision Corporation in April 1997, the Company obtained a team of technologists experienced in very high bandwidth switching architecture, specifically in Gigabit Ethernet technology. Another focus of the Company's research and development efforts is an ASICs chipset for a series of very low cost, wire-speed, 10/100, dual speed Ethernet switches and hubs in motherboard form. The Company has also implemented its Distributed Memory Switching Architecture and ASIC expertise in products based on both FDDI and Fast Ethernet. Semiconductor foundries such as LSI Logic, TSMC, MMC and ATMEL manufacture the Company's ASIC components. System Architecture Interfaces and Network Protocol Software. Through the development of its collection of 100 Mbps network adapters, the Company has gained expertise in hardware and software support for a variety of standard and proprietary system bus architectures and network operating systems. 6 Server Bandwidth Optimization. The Company has designed its network operating system software to address the specific characteristics of each type of adapter and server architecture. This design provides optimal network bandwidth to high power servers. As new versions of network operating systems are introduced, the Company plans to devote development efforts not only to maintain compatibility with existing versions but also to take advantage of enhanced features and performance improvements. As of December 31, 1997, the Company employed 62 personnel in research and development. Key members of the Company's research and development team have been active members of the various network standard committees since 1987, before the Company was founded. The Company is a charter member of the Advanced Network Test Center (ANTC), an FDDI interoperability certification center, is a member of the ANSI FDDI Standards Committee, is a member of the Gigabit Ethernet Alliance and is a principal member of the ATM Forum. The Company has developed products designed for integration in the proprietary systems of major networking companies including Sun Microsystems, Newbridge Networks, NetFRAME, NCR, and Network Associates. The Company believes that its relationships with these network technology leaders establish credibility with end-user customers who demand interoperability of their networking devices. The Company has active development relationships with Novell, Microsoft and Sun Microsystems for advanced products for NetWare, Windows NT and Solaris, respectively. COMPETITION The Company believes that the principal competitive factors in the networking market include the completeness of product offerings, product quality, price and performance, adherence to industry standards, the degree of interoperability with other networking equipment and time to market for new products. The computer networking industry is intensely competitive and is significantly affected by product introductions and market activities of industry participants. A number of competitors offer products which compete, both in price and functionality, favorably with one or more of the Company's products. Many of the Company's current and potential competitors have significantly broader product offerings and greater financial, technical, marketing and other resources and larger installed bases than the Company. Increased competition could result in price reductions, reduced margins and loss of market share, all of which would materially adversely affect the Company's business, operating results and financial condition. The Company's FDDI network adapters compete on a product-by-product basis with products offered primarily from Interphase, SysKonnect, Digital Equipment Corporation and 3Com. The Company's client/server switching solutions compete with products offered by Cisco, 3Com, Bay Networks and Cabletron and others. A number of companies developing similar technologies have been acquired by the Company's larger competitors. These acquisitions are likely to permit the Company's competitors to devote significantly greater resources to the development and marketing of new competitive products and the marketing of existing products to their installed bases. The Company expects that competition will increase as a result of these and other industry consolidations and alliances. These competitive pressures could adversely affect the Company's business and operating results. MANUFACTURING Effective mid-1997, the Company partnered with an established turnkey manufacturer in the Silicon Valley to procure material, assemble, test, package and ship the Company's products. The manufacturer is ISO certified and is highly experienced in manufacturing for other certain Fortune 500 high technology companies. The Company has ascertained that the manufacturer has the capacity, quality standards and financial capital to meet the Company's manufacturing needs. By partnering with a turnkey manufacturer, the Company has reduced its manufacturing costs and avoided significant capital investment, allowing the Company to concentrate its resources on product design and development. The Company qualifies its turnkey manufacturers using a selection program that assesses a potential subcontractor's capacity, quality standards and manufacturing process. The Company also has an in-house manufacturing team of 26 full time personnel in Taiwan, which manufactures most of its Fast Ethernet products. This team is experienced in advanced manufacturing and test engineering in ongoing reliability/quality assurance. The Company is ISO 9001 certified. 7 The Company's strategy to have certain of its products produced by a turnkey manufacturer involves certain risks including the absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant subcontractor was to become unable or unwilling to continue to manufacture and/or test the Company's products in required volumes, the Company would have to identify and qualify acceptable replacements. This process of qualifying manufacturing subcontractors and other suppliers could be lengthy, and no assurances can be given that any additional sources would become available to the Company on a timely basis. In addition, certain key components used in the Company's products, such as microprocessors, ASICs, communications controller chips, FDDI and Ethernet media interface components and power supplies, are currently available only from single sources or limited sources. The Company has also developed proprietary ASICs used in its LAN switching products and in other products, each of which is currently being supplied by a single foundry. While the Company believes it would be able to obtain alternative sources of supply for the ASICs at its election, any future difficulty in obtaining any of these key components or ASICs could result in delays or reductions in product shipments which, in turn, could have a material adverse effect on the Company's results of operations. PROPRIETARY RIGHTS The Company's success is dependent upon its proprietary technology. To date, the Company has relied principally upon patent, copyright, and trade secret laws to protect its proprietary technology. The Company generally enters into confidentiality or license agreements with its employees, distributors, customers and potential customers and limits access to, and distribution of, the source code to its software and other proprietary information. The Company has been issued one U.S. patent and has filed three additional U.S. patent applications covering certain aspects of its technology. The process of obtaining patents can be expensive, and there can be no assurance that the patent application will result in the issuance of patents, that any issued patents will provide the Company with meaningful competitive advantages, or that challenges will not be issued against the validity or enforceability of any patent issued to the Company. The Company has entered into patent license agreements relating to certain technologies used in FDDI networks. The Company believes that the terms of such licenses are comparable to those made available to other companies in the networking industry. In addition, certain technology used in the Company's products is licensed from third parties, generally on a non-exclusive basis. These licenses generally require the Company to pay royalties and to fulfill confidentiality obligations. Termination of such licenses could adversely affect the Company's business and operating results. The Company has agreed in certain cases to indemnify its customers for liability incurred in connection with the infringement of a third party's intellectual property rights. Although the Company has not received notice from any of its customers advising the Company of any alleged infringement of a third party's intellectual property rights, there can be no assurance that such indemnification of alleged liability will not be required from the Company in the future. 8 EXECUTIVE OFFICERS* The executive officers of the Company and their ages are as follows:
Name Age Position - ---- ----- -------- Pauline Lo Alker 55 President, Chief Executive Officer, and Director Robert Hersh 44 Vice President of Operations and Chief Financial Officer Fred Kiremidjian 50 Senior Vice President - NuWave Group James Sullivan 45 Vice President - NuSwitch Group Oliver Szu 41 Vice President - NuCleus Group
Mrs. Alker has served as the President, Chief Executive Officer and a Director of the Company since January 1991. Prior to joining the Company, she served as President of the Network Computers Division and President of Sales and Marketing of Acer North American Operations from October 1987 to September 1990. Prior to Acer, Mrs. Alker co-founded Counterpoint Computers, Inc., a manufacturer of modular, multiprocessor UNIX systems, where she served as Chairman, President and Chief Executive Officer until it was acquired by Acer. Prior to Counterpoint Computers, Mrs. Alker held various marketing and engineering management positions with Intel and with Four Phase Systems and Amdahl Corporation, all of which are computer systems manufacturers. From 1980 to 1984, Mrs. Alker was Vice President of Marketing and subsequently Vice President and General Manager at Convergent Technologies, Inc., a workstation manufacturer. Ms. Alker has announced her intention to retire from her position as President, Chief Executive Officer and Director of the Company in 1998 after a successor has been selected. Mr. Hersh has served as an executive officer since joining the Company in March 1997. Prior to joining the Company, he served as the Chief Financial Officer and Vice President of Finance, of SEEQ Technology, Inc., a designer and manufacturer of integrated circuits from October 1995 to February 1997. Prior to joining SEEQ, he had held executive officer and management positions with Alps Electric (USA), Inc., Widcom, Inc., and UNISYS Corporation, all technology companies. Mr. Kiremidjian has served as an executive officer since joining the Company in July 1996. Prior to joining the Company, he served as the Vice President and General Manager of Personal Products Business Unit of Xerox Corporation from October 1995 to June 1996. He has directed research and development, engineering and manufacturing operations efforts for leading Silicon Valley companies such as Acer, Convergent Technologies, Counterpoint Computers, and Fairchild Semiconductor Corp. Mr. Sullivan has served as an executive officer since joining the Company in July 1997. Prior to joining the Company, he was with Novell, Inc. from July 1995 to July 1997 where he held several sales management positions, including Vice President of Worldwide OEM Sales and Senior Director of North American Channel Sales. Prior to joining Novell, he held various sales positions with Arrow Electronics, Canon and Lanier Business Products. Mr. Szu has served as an executive officer since joining the Company in March 1996, when the Company acquired NuCom Systems, Inc. He was one of the founders of NuCom Systems, Inc. Prior to founding NuCom in 1994, he was the director of the Internetworking Department at D-Link Systems, Inc. in Taiwan and served on the D-Link Board of Directors from 1993 to 1994. * As of December 31, 1997 9 EMPLOYEES As of December 31, 1997 the Company employed 152 persons including 62 in research and development activities, 30 in manufacturing and support, 36 in sales, marketing and technical support, and 24 in finance and administration. Approximately 80 employees were in international locations. None of the Company's employees are currently represented by a labor union. The Company considers its relations with its employees to be good. The Company attempts to maintain competitive compensation benefits, equity participation and work environment policies to assist in attracting and retaining qualified personnel. Competition for employees in the Company's industry and geographical area is intense and there can be no assurance that the Company will be successful in attracting and retaining such personnel. ITEM 2. PROPERTIES The Company's principal executive offices and research and development facilities are located in Milpitas, California and consist of approximately 18,000 square feet under lease that will expire in October 2000. Additionally, the Company has research and development facilities in Taiwan and Long Island, New York. The Company has international sales offices in the Netherlands, Japan, Singapore, and Taiwan. The Company believes that its existing facilities and equipment are generally adequate to meet its immediate and foreseeable needs. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1997. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market on the Nasdaq National Market. As of March 6, 1998, there were approximately 4,800 stockholders of record. The following table sets forth, for the fiscal periods indicated, the high and low closing prices for the Common Stock, all as reported by Nasdaq. 1995 High Low --------------------------------------- -------------- -------------- First Quarter $ 30.50 $ 19.75 Second Quarter 23.13 16.75 Third Quarter 21.75 13.75 Fourth Quarter 16.00 8.88 1996 --------------------------------------- -------------- -------------- First Quarter $ 14.75 $ 10.25 Second Quarter 18.63 13.00 Third Quarter 16.63 12.25 Fourth Quarter 17.75 14.63 1997 --------------------------------------- -------------- -------------- First Quarter $ 20.88 8.63 Second Quarter 10.94 6.50 Third Quarter 7.94 5.38 Fourth Quarter 7.25 4.94 The Company has never paid or declared any cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of the business and, therefore, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. 11 ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, 1997 1996 1995 1994 1993 ---------------------------------------------------------------------- (in thousands, except per share amounts) Statement of Operations Data: Net sales $ 34,798 $ 53,080 $ 47,144 $ 33,463 $ 10,687 Cost of sales 25,341 28,590 24,690 17,507 5,633 ---------------------------------------------------------------------- Gross profit 9,457 24,490 22,454 15,956 5,054 ---------------------------------------------------------------------- Operating expenses: Research and development 9,757 8,570 4,811 3,473 1,962 Marketing and selling 13,242 11,849 7,319 4,361 1,865 General and administrative 3,982 3,378 2,226 1,618 870 Acquired research and development in process and product integration costs 6,462 13,732 -- -- -- Restructuring expense 3,662 -- -- -- -- ---------------------------------------------------------------------- Total operating expenses 37,105 37,529 14,356 9,452 4,697 ---------------------------------------------------------------------- Income (loss) from operations (27,648) (13,039) 8,098 6,504 357 Interest income, net 1,680 1,745 2,236 577 20 ---------------------------------------------------------------------- Income (loss) before income taxes (25,968) (11,294) 10,334 7,081 377 Provision for (benefit from) income taxes (3,526) 608 3,617 1,416 19 ---------------------------------------------------------------------- Net income (loss) $(22,442) $(11,902) $ 6,717 $ 5,665 $ 358 ====================================================================== Net income (loss) per share: Basic $ (1.85) $ (1.01) $ 0.60 $ 1.72 $ 0.12 ====================================================================== Diluted $ (1.85) $ (1.01) $ 0.57 $ 0.64 $ 0.05 ====================================================================== Weighted average common shares: Basic 12,154 11,760 11,147 3,302 2,895 ====================================================================== Diluted 12,154 11,760 11,736 8,906 6,641 ====================================================================== December 31, 1997 1996 1995 1994 1993 ---------------------------------------------------------------------- (in thousands) Balance Sheet Data: Working capital $ 34,439 $ 54,997 $ 63,269 $ 55,720 $ 5,280 Total assets 45,889 71,434 70,111 65,209 8,728 Long-term obligations, net of current portion -- -- -- -- 172 Stockholders' equity (deficit) 38,679 59,857 65,709 57,758 (3,181)
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The future events described in such statements involve risks and uncertainties, including: * the timely development and market acceptance of new products; * the market demand by customers for the Company's existing products, including demand by OEM customers for custom products; * competitive actions, including pricing actions and the introduction of new competitive products, that may affect the volume of sales of the Company's products; * uninterrupted supply of key components, including semiconductor devices and other materials, some of which may be sourced from a single supplier; * uninterrupted service by subcontractors; * the ability of the Company to recruit, train and retain key personnel, including engineers and other technical professionals; * the development of new technologies rendering existing technologies and products obsolete; and * general market conditions. In evaluating these forward-looking statements, consideration should also be given to the Business Risks discussed in a subsequent section of this annual report. RESULTS OF OPERATIONS Net Sales Net sales were $34.8, $53.1 and $47.1 million in 1997, 1996 and 1995, respectively. The decrease in 1997 sales compared to 1996 sales was principally attributed to decreased shipments of FDDI adapters, and to a lesser extent, decreased shipments of FDDI LAN switching products. The decreased shipments were primarily the result of declining demand for products based on FDDI technology since 1996. Partially offsetting decreased FDDI sales were increased unit shipments of Fast Ethernet switching products. However, declining average selling prices countered the increased volume. Despite decreasing demand for FDDI products, net sales in 1996 increased from 1995 as a result of growth in Fast Ethernet sales. Sales to OEM customers were $22.0, $30.5 and $27.9 million in 1997, 1996 and 1995, respectively, with the balance of sales to the distribution channel. As a percentage of net sales, shipments to OEM customers represented 63%, 57% and 59% in 1997, 1996 and 1995, respectively. Sales to the North America region were $25.8, $42.0 and $35.5 million in 1997, 1996 and 1995, respectively, with the balance of sales to the Asia and Europe regions. The Company expects the declining sales of FDDI products and the slowing growth in sales of its current Fast Ethernet products to be offset, in part, by sales of its NuWave and NuCleus products, to be introduced in 1998. NuWave is the next generation of Gigabit Ethernet and Fast Ethernet switches targeting small and medium size enterprise environments. NuCleus is a full range of low-cost, commodity switches and hubs in motherboard and chip form. Both of these new product lines are positioned primarily to broaden the Company's OEM customer base. 13 Gross Profit/Margin The gross margin in 1997 was 27%, compared to gross margins in 1996 and 1995 of 46% and 48%, respectively. The decrease in the 1997 gross margin compared to gross margins in 1996 and 1995 reflected charges for excess and obsolete inventory in 1997, offset in part by efficiency gains in manufacturing overhead in the final quarter of the year. The inventory charges included a $5.1 million charge to reserve for slow moving and obsolete inventory, as well as a $200,000 charge for scrapping of FDDI products. Additionally, competitive pricing pressures on Fast Ethernet switching products and high overhead costs in the early part of the year further eroded the gross margin. The decrease in gross margin in 1996 resulted from the inclusion of amortization of intangible assets related to the acquisition of NuCom in 1996. With the intangible assets related to the acquisition of NuCom and inventories of slow-moving products written-off in 1997 and a measurable improvement in the management of inventory and overhead, the Company expects gross margin in 1998 to improve from 1997. However, the Company does not expect future gross margin to attain the historical levels of 1996 and 1995 as competitive pricing continues to pressure the Company's current products. Furthermore, the NuCleus line of products will be sold at commodity-like prices. Research and Development Research and development expenses were $9.8, $8.6 and $4.8 million, in 1997, 1996 and 1995, respectively. As a percentage of respective net sales, the expenses were 28%, 16% and 10%. The expenses are net of contract funding of $217,000, $556,000 and $906,000 in 1997, 1996 and 1995, respectively. The increase in spending in 1997 and 1996 reflected the addition of staff and overhead associated with the acquisition of NetVision and NuCom (refer to Note 8 of Notes to Consolidated Financial Statements), respectively. The increase in 1997 was partially offset by a reduction in staff as part of the Company's restructuring in the third quarter of 1997 (refer to Note 9 of Notes to Consolidated Financial Statements). The Company believes it is essential to increase its financial and technical resources in developing the next generation Ethernet products, and thus it expects to invest substantially in research and development in 1998 to develop the NuWave and NuCleus product lines. Marketing and Selling Marketing and selling expenses increased to $13.2 million in 1997, compared to $11.8 and $7.3 million in 1996 and 1995, respectively. As a percentage of respective net sales, the expenses were 38%, 22% and 16%. The increase in expenditures in 1997 and 1996 reflected the addition of staff and overhead resulting from the acquisition of NuCom, in addition to escalating efforts to develop the distribution channel through mid-1997. This increase was partially offset by a reduction in staff and closure of sales offices as part of the Company's restructuring in the third quarter of 1997. With the Company's re-aligned strategy to focus on broadening its OEM customer base and as a result of cost reductions related to the restructuring, the Company expects marketing and selling expenses to decrease in 1998 from prior levels. General and Administrative General and administrative expenses were $4.0, $3.4 and $2.2 million in 1997, 1996 and 1995, respectively. The expenses represented 11%, 6% and 5% of net sales for each respective year. The additional staffing and overhead costs associated with the acquisition of NuCom resulted in an increase in expenditures in 1997 and 1996. Higher costs related to the information systems function and staffing issues, offset in part by reduction in headcount, were also contributing factors in the increase. To continue efficiency gains in the Company's operations, the Company implemented an Enterprise Resource Planning (ERP) system and enhanced its information system infrastructure in 1997, with the depreciation costs associated with these improvements to be reflected in 1998 and future years. The Company does not expect general and administrative costs to increase substantially 1998. As a result of implementing an ERP system and enhancing its information system infrastructure in 1997, the Company's systems are substantially year 2000 compliant (i.e. software applications functioning properly in the year 2000 and beyond). 14 Acquired Research and Development In Process and Product Integration Costs Effective April 1997, the Company acquired NetVision Corporation, a company specializing in LAN switching and Gigabit Ethernet technologies. The Company expensed $6.5 million in acquired research and development in process as a result of the acquisition. Effective March 1996, the Company acquired NuCom Systems, Inc., a Taiwan-based company developing Fast Ethernet LAN switching products. The Company expensed $13.7 million in acquired research and development in process and product integration costs as a result of the acquisition. See Note 8 of Notes to Consolidated Financial Statements for more details in connection with the acquisitions discussed above. Restructuring During 1997, the Company incurred a charge of $3.7 million for the restructuring of its business. The restructuring included a reduction in work force, closure of facilities, retirement of impaired assets and write-off of goodwill associated with the acquisition of NuCom. See Note 9 of Notes to Consolidated Financial Statements. Interest Income The Company maintained a comparable return on investment of its cash and short-term securities of $1.7 million in 1997 compared to 1996, despite lower funds being invested in 1997. This higher rate of return resulted primarily from transitioning short-term investments of tax-exempt securities to taxable securities, which provide higher returns. Interest income of $1.7 million in 1996 decreased from $2.2 million in 1995 due primarily to a lower level of invested funds associated from the acquisition of NuCom. Income Taxes The Company's effective tax rate for 1997 was a benefit of 13.6%, compared to a provision of 5.4% and 35% in 1996 and 1995, respectively. The effective tax rate in 1997 included the establishment of a full valuation allowance provided against deferred tax assets because such deferred taxes, based on current available evidence, are not expected to be realized in the foreseeable future. The effective tax rates in 1997 and 1996 excluded the charge for in-process research and development, a non-deductible item for tax purposes. LIQUIDITY AND CAPITAL RESOURCES During 1997, the Company's operating, investing and financing activities used $7.4 million of cash, compared to using cash of $3.7 million during 1996, and generating cash of $6.1 million during 1995. During 1997, $6.9 million of cash was used in operations, compared to the generation of $5.3 million in 1996, and $2.9 million in 1995. The $6.9 million of cash used by operations during 1997 was mainly attributable to the net loss for the year of $22.4 million, offset by non-cash charges of $3.3 million for deprecation and amortization, the write-off of in-process research and development associated with the NetVision acquisition of $6.5 million, the write-off of deferred tax assets of $2.3 million, and the reduction of accounts receivable of $3.2 million and inventories of $6.8 million (including an additional charge of $5.1 million for slow moving and obsolete inventory). The $5.3 million of cash generated by operations during 1996 resulted primarily from the net loss for the year of $11.9 million, after adjustment for non-cash charges of $2.8 million for depreciation and amortization and the write-off of in-process research and development associated with the NuCom acquisition of $13 million. Increases in accounts payable and accrued liabilities of $1.4 million and $1.6 million, respectively, also contributed to cash generated by operations in 1996. The $2.9 million of cash generated by operations in 1995 was attributable to the net income of $6.7 million, adjusted for depreciation and amortization of $1.3 million, and offset by a decrease in accounts payable of $3.3 million and an increase in deferred tax assets, accounts receivable, and prepaid expenses and other assets of $1.2 million, $1.1 million, and $1.2 million, respectively. During 1997, $1.4 million of cash was used in investing activities, compared to $9.6 million used in 1996, and $2.6 million generated in 1995. Cash used in 1997 of $1.4 million was attributable to the $6.5 million acquisition of NetVision and the purchase of fixed assets for $2.3 million, offset by the sale of short-term investments for $8 million. Cash used in 1996 of $9.6 million was attributable to payments of $10.4 million in the acquisition of NuCom and the purchase of fixed assets for 15 $3.0 million, offset by the sale of short-term investments for $2.6 million. Cash was generated in 1995 from the sale of short-term investments for $4.4 million, which was offset by purchases of fixed assets for $1.8 million. Cash generated from financing activities in 1997, 1996 and 1995 was $861,000, $627,000, and $638,000, respectively. These funds were raised primarily from the issuance of Common Stock upon exercise of stock options and purchases made under the employee stock purchase plan. At December 31, 1997, the Company's principal sources of liquidity were its cash and cash equivalents, and short-term investments of $16.1 million and $14.4 million, respectively. The Company also has a line of credit agreement which provides for borrowings up to $10 million, none of which has been drawn down. The Company was in compliance with all financial covenants under the line of credit agreement. The Company believes that its current cash and cash equivalents, short-term investments, and borrowing capacity will satisfy the Company's working capital and capital expenditure requirements for the next 12 months. BUSINESS RISKS In addition to the factors addressed in the preceding sections, certain characteristics and dynamics of the Company's markets, technologies and operations create risks to the Company's long-term success and to predictable quarterly results. These risks will also affect the Company's ability to achieve the results anticipated by the forward-looking statements contained in this report. The Company's quarterly results have in the past varied and are expected in the future to vary significantly as a result of factors such as the timing and shipment of significant orders, new product introductions or technological advances by the Company and its competitors, market acceptance of new or enhanced versions of the Company's products, changes in pricing policies by the Company and its competitors, the mix of distribution channels through which the Company's products are sold, the mix of products sold, the accuracy of resellers' and OEM's forecast of end-user demand, the ability of the Company to obtain sufficient supplies of sole or limited source components for the Company's products, the ability of turnkey manufacturers to meet the Company's demand, and general economic conditions. In response to competitive pressures or new product introductions, the Company may take certain pricing or marketing actions that could materially and adversely affect the Company's operating results. In the event of a reduction in the prices of its products, the Company has committed to providing retroactive price adjustments on inventories held by its distributors, which could have the effect of reducing margins and operating results. In addition, changes in the mix of products sold and the mix of distribution channels through which the Company's products are sold may cause fluctuations in the Company's gross margins. The Company's expense levels are based, in part, on its expectations of its future revenue and, as a result, net income would be disproportionately affected by a reduction in revenue. Due to the potential quarterly fluctuation in operating results, the Company believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. The markets for the Company's products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and short product life cycles. These changes can adversely affect the business and operating results of industry participants. The Company's success will depend upon its ability to enhance its existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards and address increasingly sophisticated customer requirements. The inability to develop and manufacture new products in a timely manner, the existence of reliability, quality or availability problems in the products or their component parts, the failure to obtain reliable subcontractors for volume production and testing of mature products, or the failure to achieve market acceptance would have a material adverse effect on the Company's business and operating results. The markets in which the Company competes are also characterized by intense competition. Several of the Company's competitors have significantly broader product offerings and greater financial, technical, marketing and other resources and finished installed bases than the Company. These larger competitors may also be able to obtain higher priority for their products from distributors and other resellers that carry products of many companies. A number of the Company's competitors were recently acquired, which is likely to permit these competitors to devote significantly greater resources to the development and marketing of competitive products. These competitive pressures could adversely affect the Company's business and operating results. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page Report of Independent Accountants.................................................. 18 Consolidated Balance Sheets at December 31, 1997 and 1996.......................... 19 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995............................................................. 20 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.......................................... 21 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995............................................................. 22 Notes to Consolidated Financial Statements......................................... 23 Financial Statement Schedule: For the three years ended December 31, 1997, 1996 and 1995 Schedule II - Valuation and Qualifying Accounts................................ 38
Schedules other than those listed above have been omitted since they are either not required or the information is included in the financial statements included herewith. 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Network Peripherals Inc. In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the consolidated financial position of Network Peripherals Inc. and its subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California January 21, 1998 18 NETWORK PERIPHERALS INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, 1997 1996 - --------------------------------------------------------------------------- -------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 16,094 $ 23,523 Short-term investments 14,371 22,350 Accounts receivable, net of allowance for doubtful accounts and returns; 1997, $1,184, and 1996, $1,154 5,170 8,359 Inventories 1,417 8,228 Income tax refund receivable 3,983 - Deferred income taxes, net - 2,271 Prepaid expenses and other current assets 614 1,843 -------------- --------------- Total current assets 41,649 66,574 Property and equipment, net 3,876 3,575 Other assets 364 1,285 -------------- --------------- $ 45,889 $ 71,434 ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,415 $ 2,736 Accrued liabilities 5,795 8,841 -------------- --------------- Total current liabilities 7,210 11,577 -------------- --------------- Commitments (Note 5) Stockholders' equity: Preferred Stock, $0.001 par value, 2,000,000 shares authorized; no shares issued or outstanding - - Common Stock, $0.001 par value, 20,000,000 shares authorized; 1997, 12,252,000, and 1996, 11,954,000 shares issued and 12 12 outstanding Additional paid-in capital 63,878 62,614 Accumulated deficit (25,211) (2,769) -------------- --------------- Total stockholders' equity 38,679 59,857 -------------- --------------- $ 45,889 $ 71,434 ============== =============== The accompanying notes are an integral part of these financial statements.
19 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------- ----------------- ---------------- ---------------- Net sales $ 34,798 $ 53,080 $ 47,144 Cost of sales 25,341 28,590 24,690 ----------------- ---------------- ---------------- Gross profit 9,457 24,490 22,454 ----------------- ---------------- ---------------- Operating expenses: Research and development 9,757 8,570 4,811 Marketing and selling 13,242 11,849 7,319 General and administrative 3,982 3,378 2,226 Acquired research and development in process and product integration costs 6,462 13,732 - Restructuring expense 3,662 - - ----------------- ---------------- ---------------- Total operating expenses 37,105 37,529 14,356 ----------------- ---------------- ---------------- Income (loss) from operations (27,648) (13,039) 8,098 Interest income 1,680 1,745 2,236 ----------------- ---------------- ---------------- Income (loss) before income taxes (25,968) (11,294) 10,334 Provision for (benefit from) income taxes (3,526) 608 3,617 ----------------- ---------------- ---------------- Net income (loss) $ (22,442) $ (11,902) $ 6,717 ================= ================ ================ Net income (loss) per share: Basic $ (1.85) $ (1.01) $ 0.60 ================= ================ ================ Diluted $ (1.85) $ (1.01) $ 0.57 ================= ================ ================ Weighted average common shares: Basic 12,154 11,760 11,147 ================= ================ ================ Diluted 12,154 11,760 11,736 ================= ================ ================ The accompanying notes are an integral part of these financial statements.
20 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Retained Additional Earnings Common Stock Paid-In Notes (Accumulated Shares Amount Capital Receivable Deficit) Total ------------ ------------ ------------- ------------- -------------- ------------- Balance at December 31, 1994 11,066 $ 11 $ 55,386 $ (55) $ 2,416 $ 57,758 Repurchase of Common Stock (15) - - - - - Repayment of stockholders' notes receivable - - - 41 - 41 Issuance of Common Stock upon exercise of stock options 161 - 243 - - 243 Issuance of Common Stock under employee stock purchase 56 - 354 - - 354 plan Income tax benefit associated - with nonqualified stock - 596 - - 596 options Net income - - - - 6,717 6,717 ------------ ------------ ------------- ------------- -------------- ------------- Balance at December 31, 1995 11,268 11 56,579 (14) 9,133 65,709 Repayment of stockholders' notes receivable - - - 14 - 14 Issuance of Common Stock upon exercise of stock options 200 - 228 - - 228 Issuance of Common Stock under employee stock purchase 45 - 385 - - 385 plan Income tax benefit associated with nonqualified stock - - 28 - - 28 options Issuance of Common Stock for acquisition of NuCom 441 1 5,341 - - 5,342 Systems Foreign currency translation - - 53 - - 53 adjustment Net loss - - - - (11,902) (11,902) ------------ ------------ ------------- ------------- -------------- ------------- Balance at December 31,1996 11,954 12 62,614 - (2,769) 59,857 Issuance of Common Stock upon exercise of stock options 224 - 410 - - 410 Issuance of Common Stock under employee stock purchase 74 - 451 - - 451 plan Income tax benefit associated with nonqualified stock - - 403 - - 403 options Net loss - - - - (22,442) (22,442) ------------ ------------ ------------- ------------- -------------- ------------- Balance at December 31, 1997 12,252 $ 12 $ 63,878 $ - $ (25,211) $ 38,679 ============ ============ ============= ============= ============== ============= The accompanying notes are an integral part of these financial statements.
21 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Years Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------- ------------- -------------- ------------- Cash flows from operating activities: Net income (loss) $ (22,442) $ (11,902) $ 6,717 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,969 2,111 1,309 Amortization of goodwill 1,350 665 - Acquired research and development in process 6,462 13,032 - Deferred income taxes 2,289 (56) (1,221) Changes in assets and liabilities: Accounts receivable 3,189 (1,845) (1,061) Inventories 6,811 (664) 808 Income tax refund receivable (3,580) - - Prepaid expenses and other assets 1,026 862 (1,185) Accounts payable (1,321) 1,439 (3,315) Accrued liabilities (2,644) 1,623 862 ------------- -------------- ------------- Net cash provided by (used in) operating activities (6,891) 5,265 2,914 ------------- -------------- ------------- Cash flows from investing activities: Cash paid for acquisition, net of cash acquired (6,449) (10,401) - Holdback amount from acquisition (659) 1,115 - Proceeds from sales or maturity of short-term investments 7,979 2,581 4,351 Purchases of property and equipment (2,270) (2,927) (1,761) ------------- -------------- ------------- Net cash provided by (used in) investing activities (1,399) (9,632) 2,590 ------------- -------------- ------------- Cash flows from financing activities: Proceeds from issuance of Common Stock 861 613 597 Repayment of stockholders' notes receivable - 14 41 ------------- -------------- ------------- Net cash provided by financing activities 861 627 638 ------------- -------------- ------------- Effect of exchange rate changes on cash - 53 - ------------- -------------- ------------- Net increase (decrease) in cash and cash equivalents (7,429) (3,687) 6,142 Cash and cash equivalents, beginning of year 23,523 27,210 21,068 ------------- -------------- ------------- Cash and cash equivalents, end of year $ 16,094 $ 23,523 $ 27,210 ============= ============== ============= Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes $ 158 $ 245 $ 4,852 Noncash transactions: Income tax benefit associated with nonqualified stock $ 403 $ 28 $ 596 options Common Stock issued for acquisition of NuCom $ - $ 5,342 $ - The accompanying notes are an integral part of these financial statements.
22 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY Network Peripherals Inc., a Delaware corporation (the "Company"), designs, develops, and manufactures high performance networking solutions, which it markets primarily to original equipment manufacturers, distributors, value-added resellers and system integrators. The Company's solutions are designed for use in workgroups, wiring closets and backbones. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments Management determines the appropriate classification of debt and equity securities at the time of purchase and reassesses the classification at each reporting date. The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. All of the Company's short-term investments, which consist of securities with maturities greater than 90 days and less than one year, have been classified as available-for-sale. For the years ended December 31, 1997 and 1996, there were no material unrealized gains or losses. Substantially all short-term investments are held in the Company's name by major financial institutions. Revenue Recognition Revenue from product sales is recognized upon product shipment, provided that no significant obligations remain and collectability is probable. The Company provides to certain distributors limited rights of return and price protection on unsold inventory when specific conditions exist. Provisions for estimated costs of warranty repairs, returns and allowances, and retroactive price adjustments are recorded at the time products are shipped (see Sales Reserves below). Funding under certain development contracts is recognized based upon the achievement of specified contract milestones. Such funding is recognized as an offset to the related development costs and totaled approximately $217,000, $556,000, and $906,000 in 1997, 1996 and 1995, respectively. Sales Reserves The Company provides allowances for accounts receivables deemed uncollectible, and for sales returns and other credits, including credits for retroactive price adjustments and for sales transacted within 90 days prior to the period-end. As of December 31, 1997 and 1996, the Company's allowances for such potential events totaled $1.2 million. As a percentage of sales transacted within 90 days prior to December 31, 1997 and 1996, the allowances for sales returns and other credits were 18.0% and 7.2%, respectively. 23 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and trade receivables. The Company's cash investment policies limit investments to those that are short-term and low risk. Concentration of credit risk with respect to trade receivables is generally limited due to the large number of customers comprising the Company's customer base, their dispersion across many different geographies, the Company's on-going evaluation of its customers' credit worthiness, and the established long-term relationship with certain customers. Inventories Inventories are stated at the lower of cost, using the first-in, first-out method, or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset, typically three years. Depreciation of the Enterprise Resource Planning systems and the information systems infrastructure is based on an estimated useful life of five years. Goodwill Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired and is amortized on a straight-line basis over the expected period of benefit, generally five years. Periodically, the Company evaluates the goodwill for impairment and estimates the future undiscounted cash flows of the acquired business to ensure that the carrying value has not been impaired. As of December 31, 1997 and 1996, goodwill, net of accumulated amortization, was $173,000 and $1,258,000, respectively, and was included in other assets. Software Development Costs The Company's software products are integrated into its hardware products and are typically available for general release to customers within 30 days after technological feasibility has been achieved. Accordingly, the production costs incurred after the establishment of technological feasibility and before general release to customers are immaterial, thus the Company does not capitalize any software development costs. Income Taxes The Company accounts for income taxes under the liability method, which recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their financial statement reported amounts. Foreign Currency Translation For 1997, the functional currency of the Company's subsidiary in Taiwan was the US dollar. For 1996, the functional currency was the local currency. Accordingly, gains or losses arising from the translation of foreign currency statements and transactions are included in determining consolidated results of operations. Gains or losses arising from the translation of the subsidiary's statements prior to 1997 were recorded as a separate component of the stockholders' equity. Employee Benefit Plans The Company has stock option plans, an employee stock purchase plan, and a 401(k) plan that does not require employer matching contributions. The Company does not have postretirement or postemployment benefit plans; therefore, Statements of Financial Accounting Standards ("SFAS") No. 87, 106 and 112 regarding pension, other postretirement and postemployment benefit plans do not affect the Company's financial statements. 24 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-based Compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as permitted under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under APB 25, if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Net Income Per Share The Company adopted SFAS No. 128, "Earnings Per Share," which requires dual presentation of basic earnings per share ("EPS") and diluted EPS on all statements of earnings issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options, restricted stock awards, warrants, and other convertible securities using the treasury stock method. The Company has restated all prior years' EPS to conform with the provisions of the SFAS No. 128. During 1997 and 1996, the Company incurred losses, such that the inclusion of potential common shares would result in an antidilutive per share amount. As such, no adjustment is made to basic EPS to arrive at the diluted EPS. The reconciliation of the basic and the diluted EPS computations for 1995 is as follows (in thousands): Net income as reported $ 6,717 ============= Denominator used to compute basic EPS 11,147 Effect of dilutive securities: Shares issuable upon exercise of stock options 589 ------------- Denominator used to compute diluted EPS 11,736 ============= Basic EPS $ 0.60 ============= Diluted EPS $ 0.57 ============= Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity, except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items which are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for public companies to report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. 25 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Both SFAS 130 and SFAS 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years presented to be restated. The Company's results of operations and financial position will be unaffected by implementation of these standards. Reclassifications Certain amounts in 1996 and 1995 have been reclassified to conform to the 1997 presentation. NOTE 3 - BALANCE SHEET COMPONENTS (in thousands) December 31, 1997 1996 - -------------------------------------------------------------------------------- Cash, cash equivalent, and short-term investments: Cash and money market accounts $ 16,094 $ 5,411 Municipal obligations -- 18,112 -------- -------- Cash and cash equivalents 16,094 23,523 -------- -------- Corporate debt securities 14,371 -- Municipal obligations -- 21,238 Government securities -- 1,112 -------- -------- Short-term investments 14,371 22,350 -------- -------- $ 30,465 $ 45,873 ======== ======== Inventories: Raw materials $ 158 $ 4,685 Work-in-process 898 2,600 Finished goods 361 943 -------- -------- $ 1,417 $ 8,228 ======== ======== Property and equipment: Computer and equipment $ 6,918 $ 7,181 Furniture and fixtures 895 907 Leasehold improvements 303 356 -------- -------- 8,116 8,444 Accumulated depreciation (4,240) (4,869) -------- -------- $ 3,876 $ 3,575 ======== ======== Accrued liabilities: Salaries and benefits $ 1,750 $ 2,699 Reserve for contract settlements 1,000 -- Royalty 746 1,154 Restructuring expense 597 -- Warranty 513 717 Holdback amount from acquisition 456 1,115 Customer deposits 38 605 Income taxes -- 1,268 Other 695 1,283 -------- -------- $ 5,795 $ 8,841 ======== ======== 26 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - LINE OF CREDIT The Company has a bank line of credit for $10 million which expires on July 31, 1998. Borrowings under the line of credit bear interest at the lower of the bank's prime rate or the London Interbank Offered Rate plus 2.5% and are secured by the Company's receivables, inventory, and other tangible assets. There were no borrowings under the line of credit in 1997 and 1996. As of December 31, 1997, the Company was in compliance with the financial covenants required by the line of credit agreement. NOTE 5 - COMMITMENTS The Company leases its corporate headquarters under an operating lease that expires in October 2000. The Company also has research and development and manufacturing facilities in Taiwan under various operating leases which expire in February 2002. Rent expense for all Company facilities was $931,000, $868,000, and $529,000 in 1997, 1996, and 1995, respectively. Future minimum lease payments as of December 31, 1997 are as follows (in thousands): Years ending December 31, 1998 $ 610 1999 588 2000 550 2001 321 2002 68 ------- $ 2,137 ======= The Company has entered into licensing agreements with third parties to use certain technologies in the Company's products. Under the terms of the license agreements, the Company pays a royalty based upon a percentage of the sales price or units shipped. Royalty expenses incurred are charged to cost of sales in the period of the related sales and are payable in quarterly installments. NOTE 6 - CAPITAL STOCK Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan (the "Plan"), which permits eligible employees to purchase Common Stock at a discount through payroll deductions during concurrent 24-month offering periods. Each offering period is divided into four consecutive six-month purchase periods. The price at which the Common Stock is purchased under the Plan is equal to 85% of the fair market value of the Common Stock on the first day of the offering period or the last market day of the purchase period, whichever is lower. The Company has reserved 250,000 shares of Common Stock for issuance under the Plan. Through December 31, 1997, the Company has issued 191,714 shares of Common Stock for an aggregate purchase price of $1,289,806, and 58,286 shares remain reserved for future issuance under the Plan. 27 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Option Plans In April 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan"), which provides for the granting of incentive and nonstatutory stock options and restricted stock awards to eligible employees, directors and consultants. The Company has reserved 1,500,000 shares of the Company's Common Stock for issuance under the 1997 Plan. Pursuant to the 1997 Plan, the exercise price per share of each stock option is determined by the Company's Board of Directors, provided that (i) the exercise price for an incentive stock option is not less than the fair market value of a share of Common Stock on the date of the grant and (ii) the exercise price for a nonstatutory stock option is not less than 85% of the fair market value of a share of Common Stock on the date of the grant. Options under the 1997 Plan vest over a period determined by the Board of Directors, which is generally four years. As of December 31, 1997, options to purchase 664,700 shares of Common Stock were outstanding; 835,300 shares were available for future grants; and 1,500,000 shares were authorized but unissued. Upon adoption of the 1997 Plan in April 1997, the Company terminated the 1993 Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory Stock Option Plan (the "1996 Plan"). No further stock options were granted under the 1993 Plan and the 1996 Plan. Outstanding options and shares issued upon the exercise of options granted continue to be governed by the terms and conditions of the respective plans. As of December 31, 1997, options to purchase a total of 1,893,862 shares of Common Stock under the 1993 Plan and the 1996 Plan were outstanding. The 1994 Outside Directors Stock Option Plan (the "1994 Plan"), as amended, which provides for the automatic granting of nonqualified stock options to directors of the Company ("Outside Director"), has a total of 150,000 shares reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each new Outside Director an option to purchase 15,000 shares of Common Stock and to each Outside Director an option to purchase 5,000 shares of Common Stock on the date of each annual meeting of stockholders. The exercise price of the stock options will be the fair market value of the Common Stock on the date of grant, and options vest over a period of four years. At December 31, 1997, options to purchase 38,000 shares of Common Stock were outstanding; 112,000 shares were available for future grants; and 150,000 shares of Common Stock were authorized but unissued under the 1994 Plan. The Company has elected to continue to follow APB 25 in accounting for its employee stock options and adopted the disclosure-only requirements of SFAS 123. SFAS 123 requires the disclosure of pro forma net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method in accordance with SFAS 123. The fair value of these options is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: zero dividend yield; expected volatility of 77.24% in 1997 and 69.36% in both 1996 and 1995; risk-free interest rate of 5.36% in 1997 and 5.48% in both 1996 and 1995; and all options are exercised at vesting. Had compensation cost for the Company's employee stock-based plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been:
1997 1996 1995 --------------------------------------------------------------------------------------- (in thousands, except per share data) Net income (loss) - as reported $ (22,442) $ (11,902) $ 6,717 Net income (loss) - pro forma (28,003) (14,782) 5,791 Basic earnings (loss) per share - as (1.85) (1.01) 0.60 reported Basic earnings (loss) per share - pro forma (2.30) (1.26) 0.52 Diluted earnings (loss) per share - as (1.85) (1.01) 0.57 reported Diluted earnings (loss) per share - pro (2.30) (1.26) 0.49 forma
28 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Due to the broad decline in the market price of the Company's Common Stock during 1997, a substantial amount of stock options granted had exercise prices above the current market price. On July 25, 1997 and subsequently October 31, 1997, the Company offered stock option plan participants the right to replace any remaining unexercised stock options with an equal number of options at an exercise price equal to the closing market price on such dates. The following table summarizes information about stock options outstanding at December 31, 1997:
Outstanding Exercisable ---------------------------------------------------- --------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price - -------------------- ---------------------------------------------------- --------------------------- $ 0.30 - $ 4.99 2,183,754 8.73 Years $4.77 239,566 $3.60 5.00 - 9.99 234,785 9.23 Years 6.56 27,423 6.65 10.00 - 14.99 174,023 8.89 Years 11.55 42,758 13.11 15.00 - 20.00 4,000 7.32 Years 20.00 2,666 20.00 ------------- ---------- 2,596,562 8.78 Years 5.41 312,413 5.31 ============= ==========
Stock options generally expire in 10 years from the date they are granted. The following table summarizes stock option activities for all of the Company's stock option plans:
Options Weighted Average Outstanding Exercise Price --------------------------------------------------------------------------------------------------- Balance at December 31,1994 889,425 $3.31 Granted 533,900 19.79 Exercised (161,382) 1.78 Canceled (141,817) 12.81 ----------------- Balance at December 31, 1995 (374,239 shares exercisable at a weighted average price of $1.75 per share) 1,120,126 10.19 Granted 2,905,155 14.72 Exercised (199,698) 1.14 Canceled (995,216) 15.76 ----------------- Balance at December 31, 1996 (555,417 shares exercisable at a weighted average price of $8.47 per share) 2,830,367 13.52 Granted 1,592,700 7.31 Exercised (224,160) 1.89 Canceled (1,602,345) 11.83 ----------------- Balance at December 31, 1997 2,596,562 5.41 =================
The weighted average estimated grant date fair value, as defined by SFAS 123, for options granted under the stock option plans during 1997, 1996 and 1995 were $3.29, $5.66 and $8.69, respectively. The weighted average estimated grant date fair value, as defined by SFAS 123, for purchase rights granted under the employee stock purchase plan during 1997, 1996 and 1995 were $1.43, $2.89 and $2.41, respectively. 29 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - INCOME TAXES The following is a geographical breakdown of consolidated income (loss) before income taxes (in thousands):
Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Domestic $ (21,761) $ (1,626) $ 10,334 Foreign (4,207) ( 9,668) - ------------- --------------- ------------- $ (25,968) $ (11,294) $ 10,334 ============= =============== =============
Provision for (benefit from) income taxes consists of the following (in thousands):
Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Current: Federal $ (5,815) $ 174 $ 3,862 State - 54 976 Foreign - 436 - ------------- --------------- ------------- (5,815) 664 4,838 ------------- --------------- ------------- Deferred: Federal 1,993 (46) (1,058) State 296 (10) (163) ------------- --------------- ------------- 2,289 (56) (1,221) ------------- --------------- ------------- $ (3,526) $ 608 $ 3,617 ============= =============== =============
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory income tax rate to pre-tax income (loss) as follows:
Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Federal statutory rate (35.0%) (35.0%) 35.0% State tax, net of federal impact (6.0) .3 5.1 Research and development tax credits (.8) (1.1) (1.2) Tax-exempt interest income (1.0) (4.5) (6.9) Provision for valuation allowance on deferred tax assets 22.1 - - Nondeductible acquisition costs 8.6 45.6 - Other (1.5) .1 3.0 ------------- --------------- ------------- (13.6%) 5.4% 35.0% ============= =============== =============
30 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets consist of the following (in thousands): December 31, 1997 1996 - -------------------------------------------------------------------------------- Net operating loss and credits carryforwards $ 1,575 $ -- Reserves and accruals not currently deductible 1,947 1,286 Inventory 1,789 572 Other 432 431 ------- ------- Gross deferred tax assets 5,743 2,289 Valuation allowance (5,743) -- ------- ------- Net deferred tax assets $ -- $ 2,289 ======= ======= Current $ -- $ 2,271 Noncurrent -- 18 ------- ------- Net deferred tax assets $ -- $ 2,289 ======= ======= Management believes that, based on a number of factors, it is more likely than not that the deferred tax assets will not be utilized, such that a full valuation allowance has been recorded. As of December 31, 1997, the Company has Federal net operating loss carryforwards of approximately $2.6 million which expire in 2012. For state tax purposes, the Company has net operating loss carryforwards of approximately $5.2 million which expire in 2002. NOTE 8 - ACQUISITIONS Effective April 29, 1997, the Company acquired NetVision Corporation ("NetVision"), a privately held company engaged in the development of very high bandwidth LAN switching and Gigabit Ethernet technologies, at a cost of $6.5 million, including payments to NetVision stockholders, the assumption of certain liabilities, and transaction expenses. Effective March 21, 1996, the Company completed its acquisition of NuCom Systems, Inc. ("NuCom"), a Taiwan-based company, by purchasing all the outstanding shares of NuCom in exchange for $11.2 million in cash, 440,748 shares of the Company's Common Stock valued at $5.3 million, plus product integration costs for an aggregate purchase price of $17.1 million. These transactions were accounted for using the purchase method, and the purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair market values at the date of acquisition. In each transaction, the research and development in process represented the estimated current fair market value of specified technologies which had not reached technological feasibility and had no future uses. The results of the operations acquired were included with those of the Company from the date of acquisition. The allocation of the purchase price was as follows (in thousands): Acquisition of NetVision: Research and development, in process $ 6,462 Goodwill 200 Assets 44 Liabilities assumed (257) -------------- Total $ 6,449 ============== 31 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Acquisition of NuCom: Research and development, in process $ 13,032 Other intangible assets 1,716 Cash and cash equivalents 1,357 Current assets 3,138 Non-current assets 613 Property and equipment 479 Current liabilities assumed (3,235) ------------- Total $ 17,100 ============= The total purchase price is as follows: Cash payment $ 11,158 Issuance of common stock 5,342 Other expenses 600 ------------- Total $ 17,100 ============= The pro forma combined results of operations of the Company, NetVision and NuCom for the years ended December 31, 1997 and 1996, as if the acquisitions had occurred at the beginning of the respective years, after giving effect to certain pro forma adjustments, are as follows (in thousands, except per share amount): 1997 1996 --------------------------------------------------------- Net sales $ 34,798 $ 53,080 ============= =============== Net income (loss) $(15,214) $ 1,884 ============= =============== Net income (loss) per share: Basic $ (1.29) $ 0.17 ============= =============== Diluted $ (1.29) $ 0.16 ============= =============== The foregoing pro forma results of operations excluded the amortization of goodwill and the write-off of acquired research and development in process resulting from the acquisitions. NOTE 9 - RESTRUCTURING In the third quarter of 1997, the Company announced and began to implement a restructuring plan aimed at reducing costs and restoring profitability to the Company's operations. The restructuring plan was necessitated by decreased demand for the Company's products and the Company's adoption of a new strategic direction. These actions resulted in a net charge of approximately $3.7 million to the consolidated statement of operations in 1997. The restructuring actions principally consisted of termination of approximately 70 employees, closure of certain sales and manufacturing facilities, cancellation of the related leases, and write-off of excess manufacturing equipment and goodwill. The Company expects that most of the contemplated restructuring actions will be completed in 1998 and will be financed through working capital. The following table lists the restructuring accrual activities from July 1, 1997 to December 31, 1997 (in thousands):
Reduction Write-off Write-off in Work Closure of Excess of Goodwill Force Facilities Assets Other Total ------------------------------------------------------------------------------- Reserve provided $ 962 $ 500 $ 200 $ 1,500 $ 500 $ 3,662 Reserve utilized in third quarter (962) -- (100) -- -- (1,062) Reserve utilized in fourth quarter -- (373) (8) (1,122) (500) (2,003) ------- ------- ------- ------- ------- ------- Balance at December 31, 1997 $ -- $ 127 $ 92 $ 378 $ -- $ 597 ======= ======= ======= ======= ======= =======
32 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - MARKET DATA The Company operates in one industry segment. Export sales to customers outside of North America represented 26%, 21%, and 25% of the Company's net sales for the years ended December 31, 1997, 1996 and 1995, respectively. As a percentage of net sales, export sales to Europe and Asia for 1997, 1996 and 1995 were 11% and 15%; 8% and 13%; and 17% and 8%, respectively. The following table summarizes the percentage of net sales accounted for by the Company's significant customers with sales of 10% or more: Years ended December 31, 1997 1996 1995 ------------------------------------------------------------------ Customer A 39% 26% 17% Customer B - - 15% Customer C - 15% 10% Customer D - 12% - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is no reportable information under this item. 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item regarding directors is included under "Election of Directors" in the Company's Proxy Statement for the 1998 Annual Meeting. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under "Compensation of Executive Officers" and "Report of the Compensation Committee on Executive Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under "Share Ownership by Principal Stockholders and Management" and "Election of Directors" in the Company's Proxy Statement for the 1998 Annual Meeting. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under "Compensation Committee Interlocks and Insider Participation Decisions" in the Company's Proxy Statement for the 1998 Annual Meeting. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The information required by subsections (a)1 and (a)2 of this item are included in the response to Item 8 of Part III of this Annual Report on Form 10-K.
(a) Exhibits 3.1(1) Amended and Restated Certificate of Incorporation. 3.2(1) By-Laws. 4.1(1) Fourth Amended and Restated Investor Rights Agreement dated July 15, 1993. 10.1(1) Form of Indemnity Agreement for directors and officers. 10.2(1) Amended and Restated 1993 Stock Option Plan and forms of agreement thereunder. 10.3(1) 1994 Employee Stock Purchase Plan. 10.4(1) 1994 Outside Directors Stock Option Plan and form of agreement thereunder. 10.9(1) Facilities Lease dated August 8, 1991 with John Arrillaga, Trustee, or his Trustee, or his Successor Trustee UTA dated 7/20/77, as amended, and Richard T. Peery, Trustee, or his Successor Trustee UTA dated 7/20/77, as amended. 10.12(1)(2) OEM Purchase Agreement with Network General Corporation dated March 4, 1991. 10.14(3) Amendment No. 1, dated June 1, 1994, to Facilities Lease with John Arrillaga, Trustee, or his Successor Trustee UTA dated 7/20/77, as amended, and Richard T. Peery, Trustee, or his Successor Trustee UTA dated 7/20/77, as amended. 10.18(4) Purchase Agreement among Network Peripherals Inc., Network Peripherals, Ltd., NuCom Systems, Inc., and the shareholders of NuCom, dated January 31, 1996. 10.22 (5) Line of Credit Agreement with Sumitomo Bank dated October 2, 1996. 10.23 (5) Agreement with Glenn Penisten dated May 15, 1996. 10.26 (7) Purchase Agreement among Network Peripherals Inc., NetVision Corporation, and the shareholders of NetVision , dated April 29, 1997. 10.27 (6) 1997 Stock Option Plan. 10.28 (6) Amended 1994 Outside Directors Option Plan. 10.29 (8) Development and Purchase Agreement with Sun Microsystems, Inc., dated February 25, 1994. 10.30 (8) Amendment No. 1, dated April 5, 1996, to the Development and Purchase Agreement with Sun Microsystems, Inc. 10.31 (8) Amendment No. 2, dated December 20, 1996, to the Development and Purchase Agreement with Sun Microsystems, Inc. 10.32 (8) Corporate Supply Agreement with Sun Microsystems, Inc., dated March 31, 1997. 10.33 (8) Amendment, dated April 30, 1997, to the Corporate Supply Agreement with Sun Microsystems, Inc. 10.34 Modification Agreement, dated August 29, 1997, to amend certain terms of the Line of Credit Agreement with Sumitomo Bank of California. 10.35 Second Modification Agreement, dated November 17, 1997, to amend certain terms of the Line of Credit Agreement with Sumitomo Bank of California. 10.36 Amended and Restated Salary Continuation Agreement with Pauline Lo Alker dated October 31, 1997. 10.37 Amended and Restated Salary Continuation Agreement with Robert Hersh dated October 31, 1997. 10.38 Salary Continuation Agreement with Glenn Penisten dated October 31, 1997. 10.39 Salary Continuation Agreement with Fred Kiremidjian dated October 31, 1997. 10.40 Salary Continuation Agreement with James Sullivan dated October 31, 1997. 10.41 Consent of Independent Accountants dated March 27, 1998. 27 Financial Data Schedule. 35 (b) Reports on Form 8-K None (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-78350). (2) Confidential treatment has been granted as to part of this Exhibit. (3) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994 (File No. 0-23970). (4) Incorporated by reference to the Registrant's report on Form 8-K filed on March 31, 1996 (File No. 0-23970). (5) Incorporated by reference to the corresponding exhibit in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-23970). (6) Incorporated by reference to the corresponding exhibit in the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 0-23970). (7) Incorporated by reference to the Registrant's report on Form 8-K filed on May 14, 1997 (File No. 0-23970). (8) This exhibit will be submitted with an amendment to Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K," of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-23970). The Registrant intend`s to seek confidential treatment with respect to portions of this Agreement. 36
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NETWORK PERIPHERALS INC. By: \s\ROBERT HERSH ---------------------------------- Robert Hersh Vice President of Operations and Chief Financial Officer (Authorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title \s\ PAULINE LO ALKER President, Chief Executive Officer and - -------------------------------- Director (Principal Executive Pauline Lo Alker Officer) \s\ ROBERT HERSH Vice President of Operations and - -------------------------------- Chief Financial Officer Robert Hersh (Principal Financial Officer) \s\ CHARLES HART Director - -------------------------------- Charles Hart \s\ KENNETH LEVY Director - -------------------------------- Kenneth Levy \s\ JOSEPH MARENGI Director - -------------------------------- Joe Marengi \s\ GLENN PENISTEN Chairman of the Board - -------------------------------- Glenn Penisten \s\ WILLIAM P. TAI Director - -------------------------------- William P. Tai 37 NETWORK PERIPHERALS INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands) SCHEDULE II
Additions -------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Year Expenses Accounts Deductions of Year - -------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1995 Allowance for doubtful accounts $ 165 $ - $ 88 $ (53) $ 200 Allowance for sales returns and other 744 - 1,664 (1,870) 538 credits -------------- ------------- ------------ ------------- -------------- Total allowances for doubtful accounts and sales returns 909 - 1,752 (1,923) 738 Year ended December 31, 1996 Allowance for doubtful accounts 200 - 21 (12) 209 Allowance for sales returns and other 538 - 6,743 (6,336) 945 credits -------------- ------------- ------------ ------------- -------------- Total allowances for doubtful accounts and sales returns 738 - 6,764 (6,348) 1,154 Year ended December 31, 1997 Allowance for doubtful accounts 209 - 138 (49) 298 Allowance for sales returns and other 945 - 3,593 (3,652) 886 credits -------------- ------------- ------------ ------------- -------------- Total allowances for doubtful accounts and sales returns $ 1,154 $ - $3,731 $(3,701) $ 1,184 ============== ============= ============ ============= ==============
38 EX-10.34 2 MODIFICATION AGREEMENT EXHIBIT 10.34 MODIFICATION AGREEMENT This Modification Agreement ("Modification") is made as of August 29, 1997, by and among NETWORK PERIPHERALS INC. a Delaware corporation ("Borrower"), having its chief executive office at 1371 McCarthy Boulevard, Milpitas, California 95035, SUMITOMO BANK OF CALIFORNIA, a banking association ("Sumitomo"), having its head office at 320 California Street, San Francisco, California, and each other lender which may hereafter execute and deliver an instrument of assignment with respect to this Agreement (individually, the "Bank," and collectively, the "Banks") and Sumitomo, as Agent. RECITALS A. Pursuant to a Credit Agreement, dated October 2, 1996, executed by Borrower and Sumitomo ("Agreement"), Sumitomo extended a revolving line of credit to Borrower up to $10,000,000.00 ("Line of Credit") with a $5,000,000.00 letter of credit subline. Borrower's obligation to repay advances on the Line of Credit was evidenced by a Promissory Note, dated the same date as the Agreement, executed by Borrower, in the principal amount of $10,000,000.00 ("Note"). To secure the indebtedness of Borrower under the Credit Agreement and Note, Borrower executed a Security Agreement, dated as of October 2, 1996 ("Security Agreement"). A. As used herein, the term "Loan Documents" means all documents described in these Recitals and those documents executed pursuant thereto or in conjunction therewith. A. Borrower seeks a modification of the Agreement and Sumitomo is agreeable on the terms set forth below. TERMS NOW, THEREFORE, Borrower and Sumitomo agree as follows: 1. Capitalized Terms. Unless otherwise defined herein, capitalized terms shall have the meanings set forth in the Agreement. 1. Adoption of Recitals. Borrower hereby represents and warrants that each of the Recitals set forth above are true, accurate and complete. 1. Acknowledgement of Debt. Borrower acknowledges that there are no claims, demands, offsets or defenses at law or in equity that would defeat or diminish Sumitomo's right to collect the indebtedness evidenced by the Note and Agreement and to proceed to enforce the rights and remedies available to Lender as provided in the Loan Documents or by law. 1. Modification of Loan Documents. The Loan Documents are hereby supplemented, amended and modified as follows, which terms shall supersede and prevail over any existing and conflicting provisions thereof: (a) The following new definitions are added to Section 1.1 of the Agreement: Account Obligor. Means the obligor on any Accounts Receivable. Accounts Receivable. Means open accounts arising in the ordinary course of Borrower's business from services performed or goods sold by Borrower. Borrowing Base. Means, as determined by Sumitomo from time to time, the lesser of (a) eighty percent (80.0%) of the net face amount on Borrower's Eligible Accounts after deduction of such reserves as Bank deems necessary and proper, or (b) the sum of $10,000,000.00. Collateral. Means and includes, without limitation, all property and assets granted as collateral security for Borrower's indebtedness hereunder, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described in the section of this Agreement titled "Collateral." Eligible Accounts. Means Accounts Receivable excluding the following: A. Accounts Receivable which remain uncollected more than ninety (90) days from the date they are first invoiced; any exceptions will be at the sole discretion of Sumitomo. B. Accounts Receivable due from an Account Obligor which suspends business, suffers a business failure or the termination of its existence, or makes an assignment for the benefit of creditors, or as to which a dissolution, insolvency or bankruptcy proceeding has been commenced, or as to whose property a trustee, receiver or conservator has been appointed. C. Accounts Receivable due from an Account Obligor in any manner affiliated, directly or indirectly, with Borrower, such as a stockholder, owner, parent, subsidiary, officer, director, agent or employee of Borrower. D. Accounts Receivable due from an Account Obligor which is also a Borrower hereunder. E. Accounts Receivable with respect to which payment is or may be contingent or conditional. F. Accounts Receivable due from an Account Obligor who is not a resident or citizen of, located in, or subject to service of process in the United States of America, except to the extent such Accounts Receivable are supported by insurance, bonds or other assurances satisfactory to Bank. G. Accounts Receivable subject to existing or alleged defenses, counterclaims, discounts or setoffs. H. Accounts Receivable due from an Account Obligor which is any national, state, county or municipal government, including, without limitation, any instrumentality, division, agency, body or department thereof. I. Accounts Receivable with respect to which the goods have not been shipped or delivered, or the services have not been rendered to the Account Obligor subject to any repurchase or return agreement, or which relate to goods on consignment or on approval or any similar arrangement. J. Accounts Receivable relating to an Account Obligor with respect to which twenty-five percent (25.0%) or more of the total Accounts Receivable owing by such Account Obligor are outstanding more than ninety (90) days from the date they are first invoiced. K. Accounts Receivable due from an Account Obligor which, in the aggregate, exceed twenty percent (20.0%) of the aggregate amount of all Eligible Accounts. L. Accounts Receivable as to which Borrower is or may become liable to an Account Obligor for services rendered or sales made or for any other reason, except to the extent that such Accounts Receivable exceed the amount of such liability. M. Accounts Receivable which are not owned by Borrower or are not free of all liens, encumbrances, charges, rights or interests of any kind, except in favor of Bank. N. Accounts Receivable which are evidenced by chattel paper or an instrument of any kind. O. Accounts Receivable which are not evidenced by an invoice or other documentation acceptable to Sumitomo or which are otherwise unacceptable to Sumitomo. (b) The definition of "Letter of Credit Maturity Date," as defined in Section 1.1 of the Agreement is deleted and replaced with the following: "Means November 30, 1998." (c) The definition of "Maturity Date," as defined in Section 1.1 of the Agreement is deleted and replaced with the following: "Means July 31, 1998." (d) The following new Section 2.17 is added to the Agreement: 2.17 Collateral. All obligations of Borrower under this Agreement shall be secured by the following: a. Personal Property. Borrower's obligations to Bank under this Agreement are secured by, and Borrower hereby grants to Bank, a first lien security interest in all business personal property Borrower now owns or will own in the future, including without limitation, Borrower's Accounts Receivable, equipment, chattel paper, general intangibles, Inventory, any money deposit accounts or other assets of Borrower which hereafter come into the possession, custody or control of Bank and all products and proceeds of the above-described collateral, including, but not limited to, money, deposit accounts, goods, insurance proceeds and other property. The Collateral may be further described in the Security Agreement executed by Borrower. (e) The following new Section 2.18 is added to the Agreement: 2.18 Security Interest Perfection. Agent may file or record the Financing Statements, the Intellectual Property Security Agreements and all other documents required to perfect the first priority security interest in favor of Agent and the Banks in all assets of Borrower created by the Security Agreement and the Intellectual Property Security Agreements, and Borrower shall, and shall require its Subsidiaries and any other necessary parties to, executed all other documents required to perfect a first priority security interest in favor of Agent and the Banks in all assets of Borrower; such documents may include, without limitation, security agreements and UCC financing statements. (f) The following new Section 2.19 is added to the Agreement: 2.19 Collection of Accounts Receivable. Borrower shall have the privilege, subject to revocation at the sole discretion of Bank, to collect, at Borrower's expense, the payments due on Accounts Receivable, upon the express condition that all such collections shall be received by Borrower in trust for Bank. Upon demand by Bank, whether before or after an Event of Default, Borrower shall promptly deliver to Bank, at the location specified in this Agreement, in kind, all remittances received by Borrower on Accounts Receivable, or if sales are made for cash, the identical checks, cash, or other form of payment. The receipt of any check or other item of payment by Bank shall not be considered a payment in reduction of the outstanding balance of the Line of Credit until such check or other item of payment is honored and finally paid. At any time, Bank in its sole discretion, may, but is not obligated to, notify any Account Obligor to make payment directly to Bank, and exercise any and all of Borrower's rights regarding any Accounts Receivable or any Account Obligors. (g) Section 5.1(d) of the Agreement is deleted and replaced with the following: (d) as soon as available, but in any event within ninety (90) days after the end of each of its fiscal years, a one (1) year operating plan for the new fiscal year, which operating plan shall detail, on a quarterly basis for the then-current fiscal year, Borrower's best estimate of revenue, expenses and balance sheet categories, presented in the customary form of balance sheets, income statements and cash flow statements. (h) Section 5.1(1) of the Agreement is deleted and replaced with the following: (l) from time to time, such other financial data and information, including projections, about Borrower or its Subsidiaries as any of the Banks may reasonably request; (i) The following new Section 5.1(o) is added to the Agreement: (o) in the event any Loan, Letter of Credit or other Obligation hereunder, except those Obligations arising under Section 9.3, is outstanding or unreimbursed, as soon as available, and in any event within twenty-one (21) days of the end of each month, a monthly detailed aging of the Accounts Receivable and accounts payable, a monthly inventory aging report, and a borrowing base certificate, duly executed by an authorized corporate officer of Borrower, in form acceptable to Bank. (j) Section 5.7 (a) of the Agreement is deleted and replaced with the following: (a) Quick Ratio. Borrower shall maintain a quick ratio (the applicable ratio to be calculated as (i) the sum of cash and marketable securities plus Accounts Receivable on a consolidated basis to (ii) Consolidated Current Liabilities plus, to the extent not already included as Consolidated Current Liabilities, the principal amount of the Loans and the principal amount undrawn under Letters of Credit then outstanding) of not less than 2.00: 1. (k) Section 5.7(b) of the Agreement is deleted and replaced with the following: (b) Profitability. Borrower shall be profitable on an annual basis and shall not have a net loss on a consolidated basis in any fiscal quarter as measured quarterly for that fiscal quarter; provided, however, that for the fiscal quarter ending September 30, 1997, Borrower may have a net loss on a consolidated basis of not more than $1,500,000.00; and that for the fiscal quarter ending December 31, 1997, Borrower may have a net loss on a consolidated basis of not more than $500,000.00. (1) Section 5.7 (d) of the Agreement is deleted and replaced with the following: (d) Consolidated Tangible Net Worth. Borrower shall maintain Consolidated Tangible Net Worth of at least $48,000,000.00. (m) The following new Section 5.7(f) is added to the Agreement: (f) Cash Position. Borrower shall maintain a minimum balance sheet cash position of $20,000,000.00. (n) Section 7.2(a) of the Agreement is deleted and replaced with the following: (a) Agent or the Banks may reduce the Commitment Amount to the Borrowing Base and/or the Letter of Credit Sublimit to one-half of the Borrowing Base. (o) The definition of "Effective Date" as defined in Section 1 of the Security Agreement is deleted and replaced with the following: "Effective Date" means August 29, 1997. (p) The Loan Documents which recite they are security instruments shall secure, in addition to any other obligations secured thereby, the payment and performance by Borrower of all obligations under the Agreement, the Note and the other Loan Documents, as amended by this Modification, and any amendments, modifications, extensions or renewals of the same which are hereafter agreed to in writing by the parties. 1. Conditions Precedent. Sumitomo's obligation to extend credit to Borrower pursuant to this Modification is subject to the condition precedent that Borrower strictly complies with the requirement that Borrower deliver to Sumitomo, in form and substance satisfactory to Sumitomo, the following documents and other things, duly executed by Borrower or as specified below: (a) This Agreement. (b) A renewal fee of $20,000.00. (c) Such other evidence as Lender may require, to establish the consummation of the transactions contemplated hereby, the taking of all proceedings in connection therewith and compliance with the conditions set forth in this Modification. 1. Representations and Warranties. Borrower hereby represents and warrants that no default, Event of Default, breach or failure of condition has occurred or exists, or would exist with notice or lapse of time, or both, under any of the Loan Documents. Borrower agrees that all representations and warranties of Borrower in the Agreement and the other Loan Documents are true and correct as of the date of this Modification, and shall survive the execution of this Modification. 1. Governing Law. This Modification shall be construed, governed and enforced in accordance with the laws of the State of California. 1. Interpretation. No provision of this Modification is to be interpreted for or against either Borrower or Sumitomo because that party, or that party's representative, drafted such provision. 1. Full Force and Effect. Except as set forth herein, all other terms and conditions of the Loan Documents shall remain in full force and effect, including provisions on prepayment, late charges, default interest and attorneys fees. 1. Reaffirmation. Borrower hereby acknowledges, reaffirms and confirms its obligations under the Loan Documents, as amended and modified by this Modification. 1. Entire Aqreement. This Modification (and all documents herein mentioned) and the Loan Documents constitute the entire, complete and exclusive understanding between the parties regarding the Line of Credit and the Collateral and may not be modified, amended, or terminated except by a written agreement signed by the party against whom enforcement is sought. No modification, change or supplement of the Loan Documents, this Modification or related agreements shall be binding on Sumitomo unless in writing signed by a Corporate Officer and Manager of Sumitomo. No waiver or any event of default shall be construed to be a waiver, acquiescence, or consent to any preceding or subsequent event of default. 1. Documentation. In addition to the instruments and documents mentioned or referred to herein, Borrower will, at its own cost and expense, supply Sumitomo with such other instruments, documents, information and data as are reasonably necessary for the purposes hereof, all of which shall be in form and content as reasonably required by Sumitomo. 1. Counterparts. This Modification may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Modification as of the day and year first above written. SUMITOMO: SUMITOMO BANK OF CALIFORNIA, a California banking corporation By: /s/ ARNE F. OLSON - ---------------------------------- ARNE F. OLSON, Vice President BORROWER: NETWORK PERIPHERAL, INC., a Delaware corporation By: /s/ ROBERT HERSH - ---------------------------------- ROBERT HERSH, Vice President and Chief Financial Officer EX-10.35 3 SECOND MODIFICATION AGREEMENT EXHIBIT 10.35 SECOND MODIFICATION AGREEMENT This Second Modification Agreement ("Second Modification") is made as of November 17, 1997, by and among NETWORK PERIPHERALS INC. a Delaware corporation ("Borrower"), having its chief executive office at 1371 McCarthy Boulevard, Milpitas, California 95035, SUMITOMO BANK OF CALIFORNIA, a California banking corporation ("Sumitomo"), having its head office at 320 California Street, San Francisco, California, and each other lender which may hereafter execute and deliver an instrument of assignment with respect to the Agreement (defined below) (individually, the "Bank," and collectively, the "Banks") and Sumitomo, as Agent. RECITALS A. Pursuant to a Credit Agreement, dated October 2, 1996, executed by Borrower and Sumitomo ("Agreement"), Sumitomo extended a revolving line of credit to Borrower up to $10,000,000.00 ("Line of Credit") with a $5,000,000.00 letter of credit subline. Borrower's obligation to repay advances on the Line of Credit was evidenced by a Promissory Note, dated the same date as the Agreement, executed by Borrower, in the principal amount of $10,000,000.00 ("Note"). To secure the indebtedness of Borrower under the Credit Agreement and Note, Borrower executed a Security Agreement, dated as of October 2, 1996 ("Security Agreement"). B. Pursuant to a Modification Agreement ("Modification") dated August 29, 1997, by and among Borrower and Sumitomo, on behalf of itself and as Agent for the Banks, the Agreement was modified on the terms contained therein. C. As used herein, the term "Loan Documents" means all documents described in these Recitals and those documents executed pursuant thereto or in conjunction therewith. D. Borrower seeks a further modification of the Agreement and Loan Documents and Sumitomo is agreeable on the terms set forth below. TERMS NOW, THEREFORE, Borrower and Sumitomo agree as follows: 1. Capitalized Terms. Unless otherwise defined herein, capitalized terms shall have the meanings set forth in the Agreement. 2. Adoption of Recitals. Borrower hereby represents and warrants that each of the Recitals set forth above are true, accurate and complete. 3. Acknowledgement of Debt. Borrower acknowledges that there are no claims, demands, offsets or defenses at law or in equity that would defeat or diminish Sumitomo's right to collect the indebtedness evidenced by the Note and Agreement and to proceed to enforce the rights and remedies available to Sumitomo as provided in the Loan Documents or by law. 4. Modification of Loan Documents. The Loan Documents are hereby supplemented, amended and modified as follows, which terms shall supersede and prevail over any existing and conflicting provisions thereof: (a) The following new Section 3.2(f) is added to the Agreement: (f) in the event Borrower has not reported a profitable fiscal quarter on a consolidated basis to Sumitomo commencing with the fiscal quarter ending September 30, 1997, Borrower shall deposit with Sumitomo cash collateral, acceptable to Sumitomo in its sole discretion, equal to or greater than the amount of the Loan or Letter of Credit requested by Borrower. Such cash collateral shall remain on deposit with Sumitomo until such time as Borrower reports a profitable fiscal quarter on a consolidated basis to Sumitomo. (b) Section 5.7(b) of the Agreement is deleted and replaced with the following: (b) Profitability. Except for the annual period ending December 31, 1997, Borrower shall be profitable on an annual basis and shall not have a net loss on a consolidated basis in any fiscal quarter as measured quarterly for that fiscal quarter; provided, however, that for the fiscal quarter ending December 31, 1997, Borrower may have a net loss on a consolidated basis of not more than $2,000,000.00; that for the fiscal quarter ending March 31, 1998, Borrower may have a net loss on a consolidated basis of not more than $1,250,000.00; and that for the fiscal quarter ending June 30, 1998, Borrower may have a net loss on a consolidated basis of not more than $650,000.00. (c) Section 5.7(d) of the Agreement is deleted and replaced with the following: (d) Consolidated Tangible Net Worth. Borrower shall maintain Consolidated Tangible Net Worth of at learnt $35,000,000.O0. (d) The Loan Documents which recite they are security instruments shall secure, in addition to any other obligations secured thereby, the payment and performance by Borrower of all obligations under the Agreement, the Note and the other Loan Documents, as amended by this Second Modification, and any 2 amendments, modifications, extensions or renewals of the same which are hereafter agreed to in writing by the parties. 5. Conditions Precedent. Sumitomo's obligation to extend credit to Borrower pursuant to this Second Modification is subject to the condition precedent that Borrower strictly complies with the requirement that Borrower deliver to Sumitomo, in form and substance satisfactory to Sumitomo, the following documents and other things, duly executed by Borrower or as specified below: (a) This Agreement. (b) Such other evidence as Sumitomo may require, to establish the consummation of the transactions contemplated hereby, the taking of all proceedings in connection therewith and u compliance with the conditions set forth in this Second Modification. 6. Representations and Warranties. Except as previously disclosed to Sumitomo, Borrower hereby represents and warrants that no default, Event of Default, breach or failure of condition has occurred or exists, or would exist with notice or lapse of time, or both, under any of the Loan Documents. Borrower agrees that all representations and warranties of Borrower in the Agreement and the other Loan Documents are true and correct as of the date of this Second Modification, and shall survive the execution of this Second Modification. 7. Governing Law. This Second Modification shall be construed, governed and enforced in accordance with the laws of the State of California. 8. Interpretation. No provision of this Second Modification is to be interpreted for or against either Borrower or Sumitomo because that party, or that party's representative, drafted such provision. 9. Full Force and Effect. Except as set forth herein, all other terms and conditions of the Loan Documents shall remain in full force and effect, including provisions on prepayment, late charges, default interest and attorneys fees. 10. Reaffirmation. Borrower hereby acknowledges, reaffirms and confirms its obligations under the Loan Documents, as amended and modified by this Second Modification. 11. Entire Agreement. This Second Modification (and all documents herein mentioned) and the Loan Documents constitute the entire, complete and exclusive understanding between the parties regarding the Line of Credit and the Collateral and may not be modified, amended, or terminated except by a written agreement signed by the party against whom enforcement is sought. No modification, change or supplement of the Loan Documents, this 3 Second Modification or related agreements shall be binding on Sumitomo unless in writing signed by a Corporate Officer and Manager of Sumitomo. No waiver or any event of default shall be construed to be a waiver, acquiescence, or consent to any preceding or subsequent event of default. 12. Documentation. In addition to the instruments and documents mentioned or referred to herein, Borrower will, at its own cost and expense, supply Sumitomo with such other instruments, documents, information and data as are reasonably necessary for the purposes hereof, all of which shall be in form and content as reasonably required by Sumitomo. 13. Counterparts. This Second Modification may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Second Modification as of the day and year first above written. SUMITOMO: SUMITOMO BANK OF CALIFORNIA, a California banking corporation By: /s/ ARNE F. OLSON - ---------------------------------- ARNE F. OLSON, Vice President AGENT: SUMITOMO BANK OF CALIFORNIA, a California banking corporation By: /s/ ARNE F. OLSON - ---------------------------------- ARNE F. OLSON, Vice President BORROWER: NETWORK PERIPHERAL, INC., a Delaware corporation By: /s/ ROBERT HERSH - ---------------------------------- ROBERT HERSH, Vice President and Chief Financial Officer 4 EX-10.36 4 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT EXHIBIT 10.36 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT This Amended and Restated Salary Continuation Agreement (the "Agreement") is made and entered into as of October 31, 1997 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Pauline Lo Alker ("Employee"). The Agreement supersedes in its entirety the Salary Continuation Agreement, dated as of March 22, 1995, between the Company and Employee. Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote her full attention and dedication to the Company and to continue her employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform her duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. 1 (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within two (2) years after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without the Employee's express written consent, the removal of the Employee from the Employee's position with the Company as held by the Employee immediately prior to the Change in Control (including a termination of employment as a result of the death or Permanent Disability of the Employee), except in connection with the termination of the employment of the Employee by the Company for Cause; (iii) without the Employee's express written consent, the relocation of the principal place of the Employee's employment to a location that is more than fifty (50) miles from the Employee's principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on the Employee substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; (iv) any failure by the Company to pay, or any reduction by the Company of (1) the Employee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to 2 the Employee), or (2) the Employee's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Employee and all other participants in the bonus program); (v) any failure by the Company to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Employee was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to the Employee), or (2) provide the Employee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Permanent Disability" means that: (i) the Employee has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Employee's duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within two (2) years after the occurrence of any Change in Control; 3 (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination (with the termination of employment following death or Permanent Disability being deemed a resignation); provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; or (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above. 2. Position and Duties. Until a Change in Control, Employee shall continue to be an at-will employee of the Company employed in her current position at her then current salary rate, subject to revision from time to time by the Board of Directors or a committee thereof. Employee shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Employee shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies, as amended from time to time. Employee agrees to devote her full business time, energy and skill to her duties at the Company. These duties shall include, but not be limited to, any duties consistent with her position which may be assigned to Employee from time to time. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates her employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of her death or Permanent Disability prior to a Change in Control, Employee shall be entitled to no compensation or benefits from the Company other than those earned under Section 2 above through the date of her termination of employment. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: (i) those benefits earned under Section 2 (other than any unpaid incentive bonus) through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period of two (2) years following the date of the Employee's termination (the "Severance Period"). During such period, Employee shall be entitled 4 to Employee's then current salary plus an amount equal to the entire target bonus and/or target commission (whether or not earned) pursuant to target bonus or commission plans in effect for the Employee at the time of the Change in Control, less applicable withholding, payable in accordance with the Company's normal payroll practices; (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to her termination of employment; (iv) continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)), including from the Board of Directors and any committees thereof on which the Employee serves, in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from her employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. 5 (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee shall immediately notify the Company of such acceptance and provide to the Company information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of her employment with the Company, she will not, directly or indirectly, solicit the services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any 6 disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate her employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still payable to her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as her beneficiary under this Agreement the person whose name appears below her signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: 7 if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that she is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: _________________________ By: ________________________________ Signature Title: _____________________________ Date: _________________________ ____________________________________ Employee's Signature Address for Notice to Employee: ____________________________________ ____________________________________ Name of Designated Beneficiary: Address of Designated Beneficiary: _____________________________ ____________________________________ ____________________________________ 8 EX-10.37 5 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT EXHIBIT 10.37 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT This Amended and Restated Salary Continuation Agreement (the "Agreement") is made and entered into as of October 31, 1997 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Robert O. Hersh ("Employee"). The Agreement supersedes in its entirety the Salary Continuation Agreement, dated as of April 21, 1997, between the Company and Employee. Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform his duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. 1 (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without the Employee's express written consent, the removal of the Employee from the Employee's position with the Company as held by the Employee immediately prior to the Change in Control (including a termination of employment as a result of the death or Permanent Disability of the Employee), except in connection with the termination of the employment of the Employee by the Company for Cause; (iii) without the Employee's express written consent, the relocation of the principal place of the Employee's employment to a location that is more than fifty (50) miles from the Employee's principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on the Employee substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; (iv) any failure by the Company to pay, or any reduction by the Company of (1) the Employee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to 2 the Employee), or (2) the Employee's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Employee and all other participants in the bonus program); (v) any failure by the Company to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Employee was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to the Employee), or (2) provide the Employee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Permanent Disability" means that: (i) the Employee has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Employee's duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within one (1) year after the occurrence of any Change in Control; 3 (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination (with the termination of employment following death or Permanent Disability being deemed a resignation); provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; or (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above. 2. Position and Duties. Until a Change in Control, Employee shall continue to be an at-will employee of the Company employed in his current position at his then current salary rate, subject to revision from time to time by the Board of Directors or a committee thereof. Employee shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Employee shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies, as amended from time to time. Employee agrees to devote his full business time, energy and skill to his duties at the Company. These duties shall include, but not be limited to, any duties consistent with his position which may be assigned to Employee from time to time. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of his death or Permanent Disability prior to a Change in Control, Employee shall be entitled to no compensation or benefits from the Company other than those earned under Section 2 above through the date of his termination of employment. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: (i) those benefits earned under Section 2 (other than any unpaid incentive bonus) through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period of one (1) year following the date of the Employee's termination (the "Severance Period"). During such period, Employee shall be entitled to 4 the greater of (1) Employee's then current salary at the time of the Change in Control, or (2) Employee's salary and bonus over the preceding twelve (12) months, in either case less applicable withholding, payable in accordance with the Company's normal payroll practices; (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to his termination of employment; (iv) continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)) in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. 5 (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee shall immediately notify the Company of such acceptance and provide to the Company information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of his employment with the Company, he will not, directly or indirectly, solicit the services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's 6 trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as his beneficiary under this Agreement the person whose name appears below his signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: 7 if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that he is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: _________________________ By: __________________________________ Signature Title: _______________________________ Date: _________________________ ______________________________________ Employee's Signature Address for Notice to Employee: ______________________________________ ______________________________________ Name of Designated Beneficiary: Address of Designated Beneficiary: _____________________________ ______________________________________ ______________________________________ 8 EX-10.38 6 SALARY CONTINUATION AGREEMENT SALARY CONTINUATION AGREEMENT This Salary Continuation Agreement (the "Agreement") is made and entered into as of October 31, 1997 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Glenn E. Penisten ("Employee"). Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform his duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein 1 the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; or (ii) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Employment Agreement" means that certain employment letter agreement between the Company and Employee dated May 15, 1996, as the same may be amended from time to time. (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within one (1) year after the occurrence of any Change in Control; 2 (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination; provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above, or (3) as a result of the Employee's death or permanent disability as defined in the Employment Agreement. (g) "Term" shall have the meaning assigned by the Employment Agreement. 2. Position and Duties; Term. Until a Change in Control, Employee shall continue to be an at-will employee of the Company upon the terms and conditions set forth in the Employment Agreement. This Agreement shall automatically terminate upon expiration of the Term. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of his death or permanent disability as defined in the Employment Agreement, Employee shall be entitled to no compensation or benefits from the Company other than as provided by the Employment Agreement. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: (i) those benefits earned under Section 2 through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period equal to the lesser of (1) twelve (12) months following the date of Employee's termination or (2) the remainder of the Term (the "Severance Period"). During such period, Employee shall be entitled to the Employee's then current salary as provided by the Employment Agreement, less applicable withholding, payable in accordance with the Company's normal payroll practices; 3 (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to his termination of employment; (iv) continued provision through the end of the Severance Period of the Company medical insurance coverages, if any to which the Employee would otherwise be entitled pursuant to the Employment Agreement; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance, if any, for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)), including from the Board of Directors and any committees thereof on which the Employee serves, in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee 4 shall immediately notify the Company of such acceptance and provide to the Company information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of his employment with the Company, he will not, directly or indirectly, solicit the services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the 5 prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as his beneficiary under this Agreement the person whose name appears below his signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: 6 if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that he is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: _________________________ By: ________________________________ Signature Title: _____________________________ Date: _________________________ ____________________________________ Employee's Signature Address for Notice to Employee: ____________________________________ ____________________________________ Name of Designated Beneficiary: Address of Designated Beneficiary: _____________________________ ____________________________________ ____________________________________ 7 EX-10.39 7 SALARY CONTINUATION AGREEMENT EXHIBIT 10.39 SALARY CONTINUATION AGREEMENT This Salary Continuation Agreement (the "Agreement") is made and entered into as of October 31, 1997 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Fred Kiremidjian ("Employee"). Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform his duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") 1 wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without the Employee's express written consent, the removal of the Employee from the Employee's position with the Company as held by the Employee immediately prior to the Change in Control (including a termination of employment as a result of the death or Permanent Disability of the Employee), except in connection with the termination of the employment of the Employee by the Company for Cause; (iii) without the Employee's express written consent, the relocation of the principal place of the Employee's employment to a location that is more than fifty (50) miles from the Employee's principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on the Employee substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; (iv) any failure by the Company to pay, or any reduction by the Company of (1) the Employee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to the Employee), or (2) the Employee's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the 2 actual amount of bonus compensation earned by the Employee and all other participants in the bonus program); (v) any failure by the Company to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Employee was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to the Employee), or (2) provide the Employee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Permanent Disability" means that: (i) the Employee has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Employee's duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within one (1) year after the occurrence of any Change in Control; (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to 3 effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination (with the termination of employment following death or Permanent Disability being deemed a resignation); provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; or (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above. 2. Position and Duties. Until a Change in Control, Employee shall continue to be an at-will employee of the Company employed in his current position at his then current salary rate, subject to revision from time to time by the Board of Directors or a committee thereof. Employee shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Employee shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies, as amended from time to time. Employee agrees to devote his full business time, energy and skill to his duties at the Company. These duties shall include, but not be limited to, any duties consistent with his position which may be assigned to Employee from time to time. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of his death or Permanent Disability prior to a Change in Control, Employee shall be entitled to no compensation or benefits from the Company other than those earned under Section 2 above through the date of his termination of employment. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: (i) those benefits earned under Section 2 (other than any unpaid incentive bonus) through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period of six (6) months following the date of the Employee's termination (the "Severance Period"). During such period, Employee shall be entitled to the greater of (1) Employee's then current salary at the time of the Change in Control, or (2) Employee's salary and bonus over the preceding six (6) months, in either case less applicable withholding, payable in accordance with the Company's normal payroll practices; 4 (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to his termination of employment; (iv) continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)) in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee shall immediately notify the Company of such acceptance and provide to the Company 5 information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of his employment with the Company, he will not, directly or indirectly, solicit the services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 6 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as his beneficiary under this Agreement the person whose name appears below his signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President 7 and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that he is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: _________________________ By: __________________________________ Signature Title: _______________________________ Date: _________________________ ______________________________________ Employee's Signature Address for Notice to Employee: ______________________________________ ______________________________________ Name of Designated Beneficiary: Address of Designated Beneficiary: ______________________________ ______________________________________ ______________________________________ 8 EX-10.40 8 SALARY CONTINUATION AGREEMENT EXHIBIT 10.40 SALARY CONTINUATION AGREEMENT This Salary Continuation Agreement (the "Agreement") is made and entered into as of October 31, 1997 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and James Sullivan ("Employee"). Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform his duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein 1 the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without the Employee's express written consent, the removal of the Employee from the Employee's position with the Company as held by the Employee immediately prior to the Change in Control (including a termination of employment as a result of the death or Permanent Disability of the Employee), except in connection with the termination of the employment of the Employee by the Company for Cause; (iii) without the Employee's express written consent, the relocation of the principal place of the Employee's employment to a location that is more than fifty (50) miles from the Employee's principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on the Employee substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; (iv) any failure by the Company to pay, or any reduction by the Company of (1) the Employee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to the Employee), or (2) the Employee's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the 2 actual amount of bonus compensation earned by the Employee and all other participants in the bonus program); (v) any failure by the Company to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Employee was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to the Employee), or (2) provide the Employee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Permanent Disability" means that: (i) the Employee has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Employee's duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within one (1) year after the occurrence of any Change in Control; (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to 3 effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination (with the termination of employment following death or Permanent Disability being deemed a resignation); provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; or (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above. 2. Position and Duties. Until a Change in Control, Employee shall continue to be an at-will employee of the Company employed in his current position at his then current salary rate, subject to revision from time to time by the Board of Directors or a committee thereof. Employee shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Employee shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies, as amended from time to time. Employee agrees to devote his full business time, energy and skill to his duties at the Company. These duties shall include, but not be limited to, any duties consistent with his position which may be assigned to Employee from time to time. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of his death or Permanent Disability prior to a Change in Control, Employee shall be entitled to no compensation or benefits from the Company other than those earned under Section 2 above through the date of his termination of employment. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: (i) those benefits earned under Section 2 (other than any unpaid incentive bonus) through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period of four (4) months following the date of the Employee's termination (the "Severance Period"). During such period, Employee shall be entitled to the greater of (1) Employee's then current salary at the time of the Change in Control, or (2) Employee's salary and bonus over the preceding four (4) months, in either case less applicable withholding, payable in accordance with the Company's normal payroll practices; 4 (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to his termination of employment; (iv) continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)) in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee shall immediately notify the Company of such acceptance and provide to the Company 5 information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of his employment with the Company, he will not, directly or indirectly, solicit the services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 6 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as his beneficiary under this Agreement the person whose name appears below his signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President 7 and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that he is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: _________________________ By: __________________________________ Signature Title: _______________________________ Date: _________________________ ______________________________________ Employee's Signature Address for Notice to Employee: ______________________________________ ______________________________________ Name of Designated Beneficiary: Address of Designated Beneficiary: _____________________________ ______________________________________ ______________________________________ 8 EX-10.41 9 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-32067) of Network Peripherals Inc. of our report dated January 21, 1998 appearing on page 18 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Price Waterhouse LLP San Jose, California March 27, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 12-Mos Dec-31-1997 Jan-01-1997 Dec-31-1997 16,094 14,371 6,354 (1,184) 1,417 41,649 8,116 (4,240) 45,889 7,210 0 12 0 0 38,667 45,889 34,798 34,798 25,341 25,341 37,105 0 0 (25,968) (3,526) (22,442) 0 0 0 (22,442) (1.85) (1.85)
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